**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      the fiscal year ended December 31, 2005.**


**OR**





 ̈
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      the transition period from ________ to ________.**





**Commission
      File Number 000-30929**


**KERYX
      BIOPHARMACEUTICALS, INC.**


**(Exact
      name of registrant as specified in its charter)**





**Delaware**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **13-4087132**
              (I.R.S.
                Employer
              Identification
                No.)**750
                Lexington Avenue**
              **New
                York, New York**
              (Address
                of principal executive offices)
            **10022**
              (Zip
                Code)





**Registrant’s
      telephone number, including area code: (212) 531-5965**





**Securities
      registered pursuant to Section 12(b) of the Act:**


None





**Securities
      registered pursuant to Section 12(g) of the Act:**


Common
      Stock, Par Value $0.001 Per Share


(Title
      of
      Class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes £ No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes £ No x





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No £





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this Form 10-K. £





Indicate
      by check mark whether the registrant is a large accelerated filed, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check
      one):


Large
      accelerated filer £    Accelerated
      filer x   Non-accelerated
      filer £











Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes £ No x





The
      aggregate market value of voting common stock held by non-affiliates of the
      registrant (assuming, for purposes of this calculation, without conceding,
      that
      all executive officers and directors are “affiliates”) was $344,200,850 as of
      June 30, 2005, based on the closing sale price of such stock as reported on
      the
      Nasdaq National Market.





There
      were 37,961,696 shares of the registrant’s common stock outstanding as of
      February 28, 2006.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant’s Proxy Statement for the 2006 Annual Meeting of Stockholders
      are incorporated by reference in Part III of this Annual Report on Form
      10-K.








**KERYX
      BIOPHARMACEUTICALS, INC.**


**ANNUAL
      REPORT ON FORM 10-K**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2005**





**TABLE
      OF CONTENTS**





**Page**SPECIAL
                CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
            1**PART
                I**ITEM
                1
            Business
            2ITEM
                1A
            Risk
                Factors
            18ITEM
                1B
            Unresolved
                Staff Comments
            27ITEM
                2
            Properties
            27ITEM
                3
            Legal
                Proceedings
            27ITEM
                4
            Submission
                of Matters to a Vote of Security Holders
            27**PART
                II**ITEM
                5
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            27ITEM
                6
            Selected
                Financial Data
            28ITEM
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            30ITEM
                7A
            Quantitative
                and Qualitative Disclosure About Market Risk
            38ITEM
                8
            Financial
                Statements and Supplementary Data
            38ITEM
                9
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosures
            40ITEM
                9A
            Controls
                and Procedures
            40ITEM
                9B
            Other
                Information
            40**PART
                III**ITEM
                10
            Directors
                and Executive Officers of the Registrant
            40ITEM
                11
            Executive
                Compensation
            40ITEM
                12
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            40ITEM
                13
            Certain
                Relationships and Related Transactions
            40ITEM
                14
            Principal
                Accountant Fees and Services
            40**PART
                IV**ITEM
                15
            Exhibits
                and Financial Statement Schedules
            41





This
      Annual Report on Form 10-K contains trademarks and trade names of Keryx
      Biopharmaceuticals, Inc., including our name and logo.








**SPECIAL
      CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS**





Certain
      matters discussed in this report, including matters discussed under the caption
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations,” may constitute forward-looking statements for purposes of the
      Securities Act of 1933, as amended, or the Securities Act, and the Securities
      Exchange Act of 1934, as amended, or the Exchange Act, and involve known and
      unknown risks, uncertainties and other factors that may cause our actual
      results, performance or achievements to be materially different from the future
      results, performance or achievements expressed or implied by such
      forward-looking statements. The words "anticipate," "believe," "estimate,"
      "may," "expect" and similar expressions are generally intended to identify
      forward-looking statements. Our actual results may differ materially from the
      results anticipated in these forward-looking statements due to a variety of
      factors, including, without limitation, those discussed under the captions
“Risk
      Factors,” “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” and elsewhere in this report, as well as factors which
      may be identified from time to time in our other filings with the Securities
      and
      Exchange Commission, or the SEC, or in the documents where such forward-looking
      statements appear. All written or oral forward-looking statements attributable
      to us are expressly qualified in their entirety by these cautionary statements.
      Such forward-looking statements include, but are not limited to, statements
      about our:





·
            expectations
                for increases or decreases in expenses;





·
            expectations
                for the development, manufacturing, and approval of Sulonex, KRX-0401,
                and
                our additional product candidates or any other products we may acquire
                or
                in-license;





·
            expectations
                for incurring additional capital expenditures to expand our research
                and
                development and manufacturing capabilities;





·
            expectations
                for generating revenue or becoming profitable on a sustained basis;





·
            expectations
                or ability to enter into marketing and other partnership agreements;





·
            expectations
                or ability to enter into product acquisition and in-licensing
                transactions;





·
            expectations
                or ability to build our own commercial infrastructure to manufacture,
                market and sell our drug
                candidates;





·
            estimates
                of the sufficiency of our existing cash and cash equivalents and
                investments to finance our business strategy;





·
            expected
                losses; and





·
            expectations
                for future capital requirements.





The
      forward-looking statements contained in this report reflect our views and
      assumptions only as of the date this report is signed. Except as required by
      law, we assume no responsibility for updating any forward-looking statements.





We
      qualify all of our forward-looking statements by these cautionary statements.
      In
      addition, with respect to all of our forward-looking statements, we claim the
      protection of the safe harbor for forward-looking statements contained in the
      Private Securities Litigation Reform Act of 1995.





1


**PART
      I**





*Unless
      the context requires otherwise, references in this report to “Keryx,” the
“Company,” “we,” “us” and “our” refer to Keryx Biopharmaceuticals, Inc., its
      predecessor company and our respective subsidiaries.*





**ITEM
      1. BUSINESS.**





**OVERVIEW**





We
      are a
      biopharmaceutical company focused on the acquisition, development and
      commercialization of novel pharmaceutical products for the treatment of
      life-threatening diseases, including diabetes and cancer. Our lead compound
      under development is SulonexTM (sulodexide), which we previously referred to as
      KRX-101, a first-in-class, oral heparinoid compound for the treatment of
      diabetic nephropathy, a life-threatening kidney disease caused by diabetes.
      Sulonex is in a pivotal Phase III and Phase IV clinical program under a Special
      Protocol Assessment, or SPA, with the Food & Drug Administration, or FDA.
      Additionally, we are developing ZerenexTM, an oral, inorganic, iron-based
      compound that has the capacity to bind to phosphorous and form non-absorbable
      complexes. Zerenex is currently in Phase II clinical development for the
      treatment of hyperphosphatemia (elevated phosphate levels) in patients with
      end-stage renal disease, or ESRD. We are also developing clinical-stage oncology
      compounds, including KRX-0401, a novel, first-in-class, oral anti-cancer agent
      that modulates Akt, a protein in the body associated with tumor survival and
      growth, and a number of other key signal transduction pathways, including the
      JNK and MAPK pathways, which are pathways associated with programmed cell death,
      cell growth, cell differentiation and cell survival. KRX-0401 is currently
      in
      Phase II clinical development for multiple tumor types. We also have an active
      in-licensing and acquisition program designed to identify and acquire additional
      drug candidates. To date, we have not received approval for the sale of any
      of
      our drug candidates in any market and, therefore, have not generated any
      revenues from our drug candidates.





The
      table
      below summarizes the status of our product pipeline. Each of these drugs is
      discussed more fully under the heading “Products Under
      Development.”





**Product
                candidate**
            **Target
                indication**
            **Development
                status*****Endocrine/Renal***SulonexTM
            Diabetic
                nephropathy
            Phase
                III & Phase IVZerenexTM
            Hyperphosphatemia
                in patients with
              end-stage
                renal disease
            Phase
                II***Oncology***KRX-0401
            Multiple
                forms of cancer
            Phase
                IIKRX-0402
            Brain
                cancer
            Phase
                IIKRX-0404
            Multiple
                forms of cancer
            Pre-clinical***Neurology***KRX-0501
            Neurological
                disorders
            Pre-clinical




**OUR
      STRATEGY**





We
      are
      focused on the acquisition, development and commercialization of novel
      pharmaceutical products for the treatment of life-threatening diseases,
      including diabetes and cancer. Under our strategy, we currently plan
      to:





●
            continue
                our pivotal Phase III and Phase IV program for
                Sulonex;





●
            establish
                the commercial infrastructure required to manufacture, market and
                sell our
                drug candidates following approval, if any, by the
                FDA;





●
            continue
                our company-sponsored Phase II clinical program for KRX-0401 exploring
                the
                use of KRX-0401 as a single-agent and in combination with other
                anti-cancer therapies in multiple cancer
                types;





●
            support
                additional scientific collaborations for Sulonex and
                KRX-0401;





2


●
            conduct
                additional pre-clinical and clinical trials for our other drug candidates;
                and





●
            seek
                to in-license or acquire additional compounds.





**CORPORATE
      INFORMATION**





We
      were
      incorporated in Delaware in October 1998. We commenced operations in November
      1999, following our acquisition of substantially all of the assets and certain
      of the liabilities of Partec Ltd., our predecessor company that began its
      operations in January 1997. Our executive offices are located at 750 Lexington
      Avenue, New York, New York 10022. Our telephone number is 212-531-5965, and
      our
      e-mail address is info@keryx.com.





We
      maintain a website with the address www.keryx.com. We make available free of
      charge through our Internet website our annual reports on Form 10-K, quarterly
      reports on Form 10-Q and current reports on Form 8-K, and any amendments to
      these reports, as soon as reasonably practicable after we electronically file
      such material with, or furnish such material to, the SEC. We are not including
      the information on our website as a part of, nor incorporating it by reference
      into, this report.





**PRODUCTS
      UNDER DEVELOPMENT**





**Endocrine/Renal**





***Sulonex*** *TM*





*Overview*





Our
      lead
      compound under development is Sulonex (sulodexide), which we previously referred
      to as KRX-101. We own the exclusive rights to use Sulonex for the treatment
      of
      diabetic nephropathy in North America, Japan and certain other markets outside
      of Europe. Diabetic nephropathy is a long-term complication of diabetes in
      which
      the kidneys are progressively damaged. Sulonex is a glycosaminoglycan compound
      with structural similarities to the broad family of marketed heparins and low
      molecular weight heparins. Specifically, Sulonex is comprised of heparan
      sulfate, also referred to as fast-moving heparin, dermatan sulfate and
      slow-moving heparin. This drug has been marketed in a number of European, Asian
      and South American countries for many years by our licensor for certain
      cardiovascular conditions and has a well established safety profile at the
      doses
      used for such indications. Additionally, it has been demonstrated in multiple
      clinical trials conducted in Europe and the U.S., including two randomized,
      double-blind, placebo-controlled Phase II studies, that Sulonex can reduce
      urinary protein excretion in patients with diabetic nephropathy. Sulonex is
      in a
      pivotal Phase III and Phase IV clinical program under an SPA with the FDA.
      These
      trials are being conducted by the Collaborative Study Group, or the CSG, the
      world’s largest standing renal clinical trial group.





We
      plan
      to develop Sulonex in the United States, and possibly other countries where
      we
      have exclusive rights under our license, for the treatment of diabetic
      nephropathy and potentially for other indications.





*Market
      Opportunity*





According
      to the American Diabetes Association, or the ADA, there are 18.2 million people
      in the United States, or approximately 6.3% of the population, who have
      diabetes. Of this population, approximately 13 million have been diagnosed
      with
      diabetes, of whom approximately 90-95% have been diagnosed with Type II
      diabetes. Type II diabetes results from the combination of insulin deficiency
      and the body's relative insensitivity to the insulin present, as opposed to
      Type
      I diabetes, in which severe insulin deficiency results from destruction of
      the
      insulin-producing beta cells of the pancreas. Moreover, an August 2003 study
      published by Datamonitor estimates that approximately 50% of all diabetics
      in
      the U.S., or approximately nine million people, have diabetic nephropathy.
      Diabetes is the most common cause of end-stage renal disease, or ESRD, in the
      United States and in many other developed nations, and represents approximately
      45% of all new cases of ESRD in the United States. Despite advances in clinical
      care, including improvements in glycemic or blood sugar control and blood
      pressure control, the number of Type I and Type II diabetes-related cases of
      ESRD continues to rise. In particular, the incidence of Type II diabetes-related
      ESRD is rapidly increasing. Approximately 20% of diabetics on dialysis in the
      United States survive for five years, making the mortality of end-stage renal
      failure in this group higher than most forms of cancer. Unfortunately, renal
      transplantation is an option for less than 15% of diabetics with ESRD, as
      compared to 35-40% of non-diabetics, principally due to age and concomitant
      vascular disease. Despite recent advances, diabetic nephropathy remains a
      potentially catastrophic illness for which partial but insufficient treatment
      is
      currently available.





3


*Scientific
      Background*





Both
      Type
      I and Type II diabetes are characterized by insufficient insulin effect upon
      insulin-requiring tissues. As insulin is required for normal metabolism of
      glucose, fat and protein, diabetes is accompanied by abnormal blood levels
      of
      these substances. In the short term, hyperglycemia, or elevated blood glucose,
      causes the classic symptoms of diabetes: excessive thirst, frequent urination
      and weight loss. In the long term, hyperglycemia, as well as other effects
      resulting from insufficient insulin effect, can progressively damage critical
      anatomic structures resulting in chronic diabetic complications. We are
      developing Sulonex for the treatment of diabetic nephropathy, a long-term
      complication of diabetes in which the kidneys are progressively damaged. This
      progressive damage results in diminished kidney function progressing to ESRD,
      which ultimately leads to death unless treated by dialysis and/or renal
      transplant.





The
      kidney consists of two anatomically and functionally distinct components placed
      in serial configuration. The first component is the glomerulus, which performs
      the critical filtering function of the kidney. Blood is passed through delicate
      microscopic glomerular capillary loops, which, acting as sieves, allow waste
      chemicals and excess water to pass through into the glomerular filtrate while
      retaining desirable components, such as blood cells and albumin, within the
      blood. One of the key components of the glomerular capillary filtering membrane
      is highly anionic, or negatively charged, glycosaminoglycan molecules that
      are
      similar to the chemical components of Sulonex. The glomerular filtrate, which
      is
      the precursor of what will eventually be excreted as urine, flows into the
      next
      serial component, the tubular interstitial structure. In the tubules, further
      water is extracted from the filtrate and minerals and other body chemicals
      are
      absorbed from or secreted into the filtrate.




In
      patients who have diabetic nephropathy, it is the delicate glomerular loops
      that
      first sustain damage as a result of the diabetic state. These harmful effects
      include:




·
            The
                delicate filtering membranes of the glomerular loops thicken and
                their
                crucial anionic glycosaminoglycan molecules are either depleted or
                altered
                and lose some or all of their negative charge. As the glycosaminoglycan
                negative charge provides normal filtering selectivity to the glomerular
                membranes, their loss of negative charge results in the release of
                protein, usually albumin, from the blood into the filtrate and urine.
                The
                releases of abnormal amounts of protein or albumin into the urine
                are
                called proteinuria and albuminuria,
                respectively.





·
            In
                addition, hyperglycemia induced overproduction of TGF beta, a regulatory
                protein, by the kidney induces scar formation in the area surrounding
                the
                glomerular capillaries. Over time, the extrinsic pressure of this
                scar
                tissue causes collapse of individual glomeruli, loss of functionality
                and
                release of albumin into the filtrate and
                urine.




In
      normally functioning kidneys, interstitial structures are not exposed to
      albumin. It is believed that the exposure of the interstitial structures to
      albumin ultimately leads to a potent inflammatory and scarring response
      (mediated in part by TGF beta) in the tubules, as well as in the surrounding
      interstitial tissues. This scarring results in progressive diminution in kidney
      function. As might be expected, increasing urinary albumin excretion closely
      parallels this drop in kidney function. In ESRD, kidney function declines to
      the
      point where dialysis or transplantation becomes necessary to sustain
      life.





Sulonex
      belongs to a proposed new class of nephroprotective, or kidney protecting,
      drugs, known as the glycosaminoglycans. A variety of members of this chemical
      family have been shown to decrease pathological albumin excretion in diabetic
      nephropathy in humans. Some of the members of this chemical family include
      the
      following approved drugs: standard heparin, low molecular weight heparin and
      danaparoid. These agents all require therapy by injection and are all potent
      anticoagulants, which are blood thinners capable of inducing bleeding. Sulonex,
      on the other hand, is given orally and, in this form, has demonstrated little,
      if any, anticoagulant effects to date.





*Pre-Clinical
      and Clinical Data*





*Pre-Clinical
      Data*





In
      pre-clinical studies, glycosaminoglycan components similar or identical to
      those
      that make up Sulonex have been evaluated using well accepted rodent models
      of
      diabetic nephropathy, in both preventive protocols where the drug was given
      at a
      time when diabetes was induced and prior to kidney damage, and treatment
      protocols, where the drug was given after diabetic kidney damage was already
      present. These glycosaminoglycans diminished the thickening of glomerular
      capillary filtering membranes, replenished the crucial anionic, or albumin
      repelling, charge, lowered urinary albumin leakage and decreased kidney
      expression of the specific scar protein collagen IV, both in the preventive
      and
      the treatment protocols, returning these parameters nearly to their normal
      levels. In addition, data demonstrated that Sulonex suppresses the
      hyperglycemia-induced, or high glucose-induced, overproduction of TGF beta,
      one
      of the most specific inducers of kidney scarring in diabetic and other kidney
      diseases. Thus, glycosaminoglycans similar or identical to the components of
      Sulonex in pre-clinical models have prevented or reversed the hallmark
“upstream” pathological abnormalities that drive the engine of progressive
      kidney dysfunction. Data was presented at the 2005 American Society of
      Nephrology’s Renal Week that demonstrated that Sulonex inhibited heparanase, an
      enzyme that is over-expressed in diabetic nephropathy patients and is believed
      to be a contributing factor to the long-term damage to the kidneys as a result
      of diabetes.





4


*European
      Clinical Data*





In
      Europe, there have been approximately 20 studies published assessing the safety
      and efficacy of Sulonex in humans. Sulonex has been administered to more than
      3,000 patients in clinical trials conducted in Europe for the treatment of
      certain diabetic and non-diabetic conditions and, to our knowledge, has not
      demonstrated any significant side effects at the doses tested for those
      uses.





European
      researchers, with the support of Alfa Wassermann S.p.A., or Alpha Wasserman,
      the
      licensor of Sulonex, conducted a randomized, double-blind, placebo-controlled,
      Phase II study of the use of Sulonex to treat diabetic nephropathy in 223
      patients in Europe between 1996 and 1999. In this study, also known as the
      DiNAS
      study, Type I and Type II diabetics with diabetic nephropathy were treated
      daily
      for four months with 50, 100 and 200 milligram gelcaps of Sulonex. These
      patients showed substantial dose-dependent reduction in proteinuria or
      pathological urinary albumin excretion rates. In this study, the higher the
      dose
      administered daily, the greater the demonstrated decrease in albumin excretion.
      The DiNAS study was published in the June 2002 issue of the Journal of the
      American Society of Nephrology.





*U.S.-based
      Clinical Data*





Our
      recently completed, U.S.-based Phase II multi-center clinical study was
      conducted by the CSG. This randomized, double-blind, placebo-controlled study
      compared two doses (200 mg and 400 mg daily) of Sulonex versus placebo for
      the
      treatment of diabetic nephropathy in 149 patients between 2003 and 2005. We
      announced the positive results of this study at the American Society of
      Nephrology’s Renal Week in November 2005. The results of the study are presented
      below.





*Design
      of the Phase II Study*





The
      Phase
      II study was designed as a pilot for the fully-powered pivotal Phase III study,
      which is currently ongoing. In this Phase II study, two doses of Sulonex (200
      mg
      and 400 mg) were compared to placebo in patients with diabetic microalbuminuria
      on maximal therapy with an angiotensin converting enzyme inhibitor, known as
      an
      ACEi, or a angiotensin receptor blocker, known as an ARB. Patients were treated
      with Sulonex or placebo for six months and followed for an additional two months
      post-treatment. Patients were randomized 1:1:1, placebo, 200 mg and 400 mg
      of
      Sulonex, respectively.





In
      this
      Phase II study, the primary endpoint for the study was the percentage of
      patients achieving “therapeutic success” at six months. This is also the
      endpoint in the protocol for the Sulonex Phase III clinical trial now recruiting
      patients, and which was agreed to with the FDA under an SPA. A patient is
      considered a therapeutic success if they achieve one of the following outcomes
      following the six months in the study:





(1)
            50%
                reduction in albumin to creatinine ratio or ACR (ACR is a standard
                measurement used to assess the level of kidney disease in these patients.
                ACR measures the level of albumin protein in urine, also referred
                to as
                albuminuria,) or





(2)
            Normalization
                of ACR with at least a 25% reduction in ACR (in this study the normal
                laboratory range for albuminuria was defined as less than 20mg of
                albumin
                to 1g of creatinine).





*Phase
      II Data Analysis*





A
      total
      of 149 patients were randomized into the study. All patients evaluable for
      therapeutic success at six months (i.e. all patients with a baseline ACR and
      a
      six-month ACR) were included in the intent to treat analysis, for a total of
      136
      patients. All patients in the intent to treat population that at baseline were
      within the target eligibility range of microalbuminuria as defined in the
      protocol (ACR 20mg/G to 200mg/G) were included in the per protocol analysis,
      for
      a total population of 117 patients.





All
      of
      the primary and secondary analyses shown were pre-specified. For the primary
      endpoint analysis, statistical nominal p values have been provided for
      informational purposes only since this Phase II study, as a pilot study, had
      less than a 20% power to show statistically significant results for these
      endpoints.





5


The
      data
      is presented in two ways. First, the 200mg arm is compared to placebo because
      the 200mg is the dose in our Phase III and Phase IV protocols, as agreed to
      with
      the FDA under the SPA. Next, the data is presented as active (200mg and 400mg)
      vs. placebo; this was the primary endpoint defined by the Phase II protocol.
      Information on the effects of the 400mg arm alone can be found in the footnotes
      to the tables. The dose response relationship of Sulonex previously demonstrated
      up to 200mg was not observed from 200mg to 400mg in this study.





Table
      1—Primary Endpoint Analysis (Therapeutic Success at six months) (200mg vs.
      Placebo)





Number
                of Patients
              (Placebo/200mg)
            Placebo
            200mg
            p
                value
              Fisher’s
                Exact Test (2-sided)Per
                Protocol
            36/36
            11.0%
            33.0%
            P=.045Intent
                to Treat
            42/44
            14.0%
            32.0%
            P=.074





Table
      2—Primary Endpoint Analysis (Therapeutic Success at six months) (200mg and
      400mg (1) vs.
      Placebo)





Number
                of Patients
              (Placebo/Active)
            Placebo
            Active
              (200mg
                and 400mg)1
            p
                value
              Fisher’s
                Exact Test (2-sided)Per
                Protocol
            36/81
            11%
            25%
            P=.136Intent
                to Treat
            42/94
            14%
            26%
            P=.180





1
      For the 400mg group alone, the Therapeutic Success was 18% on a per protocol
      basis and 20% on intent to treat basis.





Table
      3—Secondary Endpoint Analysis at Six months (Intent to Treat)





Placebo
              n=42
            200mg
              n=44
            Active
              (200mg
                and 400mg1)
              n=94>50
                % reduction in ACR
            12.0%
            27.0%
            22.0%Normalization
                of ACR
            9.0%
            23.0%
            17.0%


1
      For the 400mg group alone, the 50% reduction and normalization were 18% and
      10%,
      respectively.





Table
      4—Average Changes of ACR Over Time (Intent to Treat)1





200mg
                vs. Placebo
            Placebo
                vs. Baseline
            200mg
                vs. BaselineTwo
                months
            -17.00%
            -4.0%
            -21.00%Four
                months
            -25.78%
            7.5%
            -18.28%Six
                months
            -28.03%
            12.57%
            -15.46%Eight
                months
              (Two
                months off therapy)
            -28.98%
            18.5%
            -10.48%


1
      The average changes from baseline over time for the 400mg dose group were 3.4%,
      3.24%, 5.59% and 12.59%, respectively.





On
      February 7, 2006, an independent Data Safety Monitoring Committee, or DSMC,
      met
      to review the safety data from the Phase II Pilot study as well as the follow-up
      Long-Term Open-Label Tolerability and Safety study. The DSMC concluded that
      (i)
      the risk/benefit ratio of KRX-101 (Sulonex) for the treatment of diabetic
      nephropathy is acceptable, (ii) the serious adverse event, or SAE, profile
      seen
      in either the Phase II Pilot and the Long-Term Open-Label Tolerability and
      Safety studies were similar to placebo and are consistent with the patient’s
      co-morbidities of diabetes, hypertension, and/or hyperlipidemia, (iii) no
      clinically relevant bleeding events have been documented in either study and
      no
      changes in coagulation parameters assessed during the Phase II Pilot study
      have
      been noted, (iv) further monitoring of coagulation parameters in either the
      Phase III (Micro) or Phase IV (Macro) studies are not warranted and the use
      of
      other anticoagulants such as warfarin, anti-platelet agents, etc. with KRX-101
      (Sulonex) is permitted, and (v) based on a review of the safety data from both
      the Phase II Pilot and Open-Label Tolerability and Safety studies, both the
      Phase III (Micro) and Phase IV (Macro) studies should continue to randomize
      patients and no protocol amendments to either study are necessary. In the Phase
      II pilot study there were four SAEs in four patients in the placebo group,
      twenty-three SAEs in fifteen patients in the 200mg group and five SAEs in five
      patients in the 400 mg group. In the Long-Term Open-Label Tolerability and
      Safety study, there have been twenty-seven SAEs in fourteen patients.





6


*Development
      Status*





In
      June
      2000, we filed an investigational new drug application, or IND, with the FDA
      for
      permission to conduct a clinical trial for the treatment of patients with
      diabetic nephropathy. In 2001, Sulonex was granted Fast-Track designation for
      the treatment of diabetic nephropathy, and, in 2002, we announced that the
      FDA
      had agreed, in principle, to permit us to avail ourselves of the accelerated
      approval process under subpart H of the FDA’s regulations governing applications
      for the approval to market a new drug. Generally, subpart H allows for the
      use
      of surrogate endpoints in Phase III trials to support the approval of an NDA
      with confirmatory studies completed post-approval, and could greatly reduce
      the
      development time to market.





In
      the
      third quarter of 2003, we announced that CSG would conduct the U.S.-based Phase
      II/III clinical program for Sulonex for the treatment of diabetic nephropathy.
      The CSG has conducted multiple large-scale clinical trials resulting in over
      40
      publications in peer-reviewed journals. In addition, the CSG conducted the
      pivotal studies for two of the three drugs, including an ACE inhibitor and
      an
      ARB, that are currently approved for the treatment of diabetic nephropathy.





In
      the
      fourth quarter of 2003, we initiated the Phase II portion of our Phase II/III
      clinical program for Sulonex, and in the third quarter of 2004, we completed
      the
      target enrollment for the Phase II portion of the clinical program. The results
      of the Phase II are presented above under the caption “Phase II Data Analysis.”





In
      January 2005, we announced that the CSG recommended that we proceed to the
      Phase
      III portion of our Phase II/III clinical program of Sulonex. This recommendation
      was based on the completion, by an independent DSMC, on January 4, 2005, of
      a
      safety evaluation of the first interim analysis from the 149 patient,
      randomized, double-blind, placebo-controlled Phase II clinical trial of Sulonex
      discussed above, and an efficacy assessment of the same data set conducted
      by
      the CSG.





In
      March
      2005, we announced that we had finalized an SPA agreement with the FDA for
      the
      Phase III and Phase IV clinical trials of Sulonex.





In
      June
      2005, we announced the initiation of our pivotal Phase III and Phase IV clinical
      program for Sulonex. We are conducting both of these trials under our SPA with
      the FDA. This clinical plan consists of: a single Phase III trial in patients
      with microalbuminuria based on the surrogate marker of regression of
      microalbuminuria as the primary endpoint; supportive data from previously
      conducted clinical studies; and substantial recruitment into our Phase IV
      confirmatory study that will measure clinical outcomes in patients with overt
      nephropathy, or macroalbuminuria. The Phase III portion of the program is a
      randomized, double-blind, placebo-controlled study comparing a 200 milligram
      daily dose of Sulonex versus a placebo in patients with persistent
      microalbuminuria. The Phase IV portion of the program is a randomized,
      double-blind, placebo-controlled study comparing a 200 milligram daily dose
      of
      Sulonex versus a placebo in patients with persistent macroalbuminuria. The
      CSG
      is conducting the pivotal Phase III and Phase IV clinical program of Sulonex
      for
      the treatment of diabetic nephropathy.





In
      November 2005, we announced positive final results from our Phase II study
      of
      Sulonex for diabetic nephropathy at the American Society of Nephrology’s (ASN)
      Renal Week. Interim positive results from this study had been previously
      announced at the National Kidney Foundation's Spring Clinical Meeting in May
      2005. The Phase II study is discussed in detail above under “U.S.- based
      Clinical Data.”





The
      ultimate clinical timeline, and consequent cost, for further development of
      Sulonex will depend, in part, on the successful completion of our Phase III/IV
      trials, and ultimate approval by the FDA.





***Zerenex*** *TM*





Zerenex,
      is an oral, inorganic, iron-based compound that has the capacity to bind to
      phosphorous and form non-absorbable complexes. Zerenex is currently in Phase
      II
      clinical development for the treatment of hyperphosphatemia (elevated phosphate
      levels) in patients with ESRD. The efficacy of Zerenex has been demonstrated
      in
      two previous Phase II clinical trials using single fixed dose regimens. In
      both
      studies, Zerenex was able to significantly reduce serum phosphorous (p
<.005), and the degree of reduction was comparable to calcium based products
      which were used as control arms in those studies. See Tables 5 and 6 below.
      Panion & BF Biotech, Inc., the licensor of Zerenex, is currently in the
      process of finalizing the results of a dose-ranging, randomized,
      placebo-controlled, multi-center Phase II clinical trial in 116 patients with
      final results from this study expected in the first half of 2006.





7


Table
      5—Effects on Serum Phosphorus at 4 Weeks (n=28)





Open
      Label, Randomized, Parallel Groups, 2 sites





Serum
                PhosphateBaseline
                (mg/dL)
            End-Point
              (Four
                Weeks) (mg/dL)
            Change
              from
                BaselineZerenexTM
                (4.5 g/day)
            7.2
                +/- 2.5
            5.9
                +/- 2.0
            P<0.005Calcium
                Acetate (PhosLo®)
                (4 g/day)(1)
            7.2
                +/- 2.0
            5.6
                +/- 1.7
            P<0.005


1  Serum
      calcium increased significantly from baseline to end of treatment (8.7 +/-
      0.5
      mg/dL to 9.2 +/- 0.7 mg/dL) only in the calcium acetate group.





Table
      6—Effects on Serum Phosphorus at 4 Weeks (n=54)





Open
      Label, Randomized, Crossover, 2 sites





Serum
                PhosphateBaseline
                (mg/dL)
            End-Point
              (Four
                Weeks) (mg/dL)
            Change
              from
                BaselineZerenexTM
                (3 g/day)
            6.7
                +/- 1.9
            5.7
                +/- 1.6
            P<0.001Calcium
                Carbonate (3 g/day)(1)
            7.2
                +/- 1.9
            5.2
                +/- 1.5
            P<0.001


1  Serum
      calcium increased only in patients treated with calcium carbonate.





**Oncology**





***KRX-0401***





*Overview*





We
      are
      also developing KRX-0401 (perifosine), which is a novel, first-in-class, oral
      anti-cancer agent that modulates Akt, a protein in the body associated with
      tumor survival and growth, and a number of other key signal transduction
      pathways, including the JNK and MAPK pathways, which are pathways associated
      with programmed cell death, cell growth, cell differentiation and cell
      survival.  This
      compound has demonstrated preliminary single agent anti-tumor activity and
      is
      currently in a Phase II clinical program where it is being studied both as
      a
      single agent and in combination with other anti-cancer treatments for multiple
      forms of cancer.





KRX-0401
      is the prototype of a new group of anti-cancer drugs referred to as
      alkylphosphocholines that block proliferation and induce the apoptosis of cancer
      cells. This effect is relatively specific for cancer cells compared to normal
      cells. The mechanism of action for these drugs is not clear.
      Alkylphosphocholines are known to modulate signaling in a number of pathways
      known to function abnormally during the development of cancer. One of the
      pathways inhibited by the alkylphosphocholines is Akt, a pathway associated
      with
      tumor survival, growth and resistance to many standard cancer therapies. Akt
      is
      considered to be one of the most important cancer targets being researched
      today.





In
      September 2002, ACCESS Oncology, Inc., or ACCESS Oncology, a biopharmaceutical
      company we acquired in February 2004, entered into an exclusive commercial
      license agreement with Zentaris AG, a wholly owned subsidiary of AEterna
      Zentaris Inc., acquired a license to a series of U.S. and foreign patents and
      patent applications relating to the composition of matter and use of KRX-0401
      in
      the treatment of cancer and other conditions. This license agreement covers
      the
      United States, Canada and Mexico.





*Pre-Clinical
      and Clinical Data*





In
      vitro,
      KRX-0401 inhibits the growth of a variety of human tumor cell lines and has
      substantial activity in vivo against a number of murine tumor models and human
      xenografts. In model systems the drug appears to be synergistic with
      radiotherapy and additive or synergistic with cytotoxics such as cisplatin,
      Adriamycin, and cyclophosphamide. In these experiments, the combination regimens
      were superior to chemotherapy alone and were well tolerated.





8


Pre-clinical
      studies presented at the American Society of Hematology Annual Meeting in
      December 2005 demonstrated KRX-0401’s potential utility in the treatment of
      multiple myeloma and possibly other forms of hematological tumors. These studies
      demonstrated KRX-0401 to be active against human multiple myeloma cell lines
      and
      freshly isolated myeloma cells from multiple myeloma patients' bone marrow,
      including those cells which were resistant to dexamethasone and doxorubicin.
      KRX-0401 was shown to modulate a number of key cellular functions involved
      in
      the replication and death of multiple myeloma cells, and, as in other cell
      lines, it was shown to be a potent Akt inhibitor. KRX-0401 was active in vitro
      and in vivo when used alone, and it appeared to be synergistic when combined
      with either bortezomib (Velcade ® )
      or
      dexamethasone.




Six
      Phase
      I studies of KRX-0401 have been completed, three in Europe by Zentaris and
      three
      in the U.S. by the National Cancer Institute, or NCI, a department of the
      National Institutes of Health, or NIH, as part of a Cooperative Research and
      Development Agreement, or CRADA, and by us. These trials demonstrated that
      KRX-0401 can be safely given to humans with an acceptable toxicity profile
      and
      no observed myelosuppression, or bone marrow suppression. The dose limiting
      toxicity in the Phase I studies was gastrointestinal: nausea, vomiting and
      diarrhea. In addition, some patients experienced fatigue, especially with
      prolonged administration. In these Phase I studies, there was single agent
      activity as evidenced by two durable partial responses (one of which lasted
      more
      than six months and the other more than 18 months) out of 10 patients with
      previously treated, evaluable soft tissue sarcomas, a tumor type relatively
      unresponsive to chemotherapy. In addition, 21 patients were considered by the
      investigators to have had disease stabilization for two or more months,
      including patients with sarcomas (2), prostate cancer (3), non-small cell lung
      cancer (2), breast cancer (2), colon cancer (2), melanoma (2), renal cancer
      (2),
      ovarian cancer (1), salivary gland cancer (1), mesothelioma (2) and hepatoma
      (2). The meaning of disease stabilization in an individual patient in a Phase
      I
      study is difficult to assess because the time to progression is variable and
      may
      give a false impression of stabilization in individual patients. We believe
      that
      the Phase I data provides clinical evidence of the anti-cancer effects of
      KRX-0401.





The
      NCI
      has completed a number Phase II clinical trials studying KRX-0401 as a single
      agent, including studies in prostate, breast, head and neck and pancreatic
      cancers, as well as melanoma and sarcomas. In total, nine NCI clinical trials
      have been conducted across the six tumor types mentioned. The NCI and its
      collaborators have presented and/or published data from seven of their Phase
      II
      studies, including from Phase II studies involving prostate (2), sarcoma, head
      and neck, melanoma, pancreas and breast cancers. Findings from these studies
      led
      the investigators to conclude that the drug was safe and well-tolerated at
      the
      Phase II dose utilized. The studies used dosing schedules in which a large
      “bolus” dose was given on day one or once every 28 days followed by daily doses
      either continuously or on days two to 21 of a four-week cycle. Bolus doses
      ranged from 300 mg to 900 mg followed by daily doses of 100 - 150 mg. These
      studies confirm the safety profile of the bolus plus daily regimens, which
      had
      limited grade 3 and no grade 4 gastrointestinal toxicity, the dose limiting
      toxicity in most of the Phase I trials. However, studies using a single bolus
      dose of 600 mg to 900 mg on day one and continuous daily KRX-0401 at a dose
      of
      100 mg per day appeared to be better tolerated than studies that used a larger
      bolus dose on day one of every 28-day cycle followed by 150 mg per day on days
      two to 21. In the published Phase II sarcoma study, the investigators reported
      a
      partial response (greater than 50% decrease in tumor mass) as well as several
      disease stabilizations. With the responses seen in the Phase I trials, there
      are
      now three sarcoma patients with durable partial responses. This has led us
      to
      consider exploring additional studies in sarcoma. On the Phase II breast cancer
      study, the investigators scored three of 15 evaluable patients as having stable
      disease. One of these patients had measurable tumor regression which failed
      to
      reach the level of a partial response by the time the patient elected to
      withdraw from the study because of gastrointestinal toxicity. The breast cancer
      trial utilized the more toxic of the regimens employed in these NCI Phase II
      studies. In the melanoma trial published by the National Cancer Institute of
      Canada, one patient with a primary mucosal melanoma of the vagina and inguinal
      adenopathy had a 50% reduction in the size of the palpable nodes after four
      cycles but developed new disease after the fifth cycle.





In
      May
      2005, we announced that Phase II data presented at the annual meeting of the
      American Society of Clinical Oncology in Orlando, Florida demonstrated the
      tolerability and potential efficacy of KRX-0401 in the treatment of patients
      with biochemically recurrent hormone-sensitive prostate cancer, or HSPC. The
      investigators concluded that KRX-0401 in the treatment of HSPC patients is
      feasible, well-tolerated, reduced prostate-specific antigen, or PSA, levels
      in
      some patients, and resulted in disease stabilization in approximately 80% of
      patients. Because of its inhibitory effects on the Akt and related pathways,
      we
      believe that further studies of KRX-0401 in combination with androgen ablation
      and chemotherapy are warranted. In a second study published by investigators
      at
      the NCI, there were no radiographic responses or PSA declines of 50% or greater
      related to KRX-0401, but four patients had stable PSA values for 12 weeks or
      longer. Eleven of 14 patients, or 78%, in whom circulating tumor cells were
      measured pre- and post-treatment, showed a decreased number of circulating
      tumor
      cells after treatment.





9


*Development
      Status*





During
      the second quarter of 2004, we announced the initiation of a Phase II program
      utilizing KRX-0401 as a single agent and in combination with a number of
      standard anti-cancer therapies in multiple tumor types. To date, we have
      initiated a number of trials under this program, including single agent studies
      in lung cancer and sarcoma, and combination studies with a number of standard
      anti-cancer treatments, such as gemcitabine, paclitaxel, docetaxel, Herceptin®
and endocrine therapy. We have also initiated an “all-comers” Phase II clinical
      trial evaluating KRX-0401 as a single-agent, administered either weekly or
      daily
      in a variety of tumor types.





In
      January 2006, we announced the initiation of a clinical program to evaluate
      KRX-0401 as a treatment for multiple myeloma, following positive pre-clinical
      data presented at the American Society of Hematology Annual Meeting in December
      2005, as discussed above. In an ongoing Phase II study, patients with relapsed
      or relapsed/refractory multiple myeloma are treated with KRX-0401 (150 mg oral
      daily dose) to assess the single agent activity of KRX-0401 in this patient
      population. If a patient progresses on KRX-0401 alone, dexamethasone (20mg
      twice
      weekly) is added to their KRX-0401 regimen. This study is similar in design
      to
      the Velcade ® pivotal
      Phase II program, the SUMMIT study.





We
      plan
      to commence additional Phase II trials in 2006.





The
      ultimate clinical timeline, and consequent cost, for further development of
      KRX-0401 will depend, in part, on the successful completion of our Phase II
      trials, and ultimate approval by the FDA.





***KRX-0402***





KRX-0402
      (O6-benzyl guanine or O6-BG) is a small molecule that was specifically designed
      to block the DNA repair protein, AGT. AGT confers resistance to 06-alkylating
      agents, such as temozolomide and BCNU, that are commonly used to treat brain
      cancer, melanoma and non-Hodgkin’s lymphoma. Recent research has shown that
      KRX-0402 can also potentiate the activity of other alkylating agents, such
      as
      cisplatinum and carboplatinum. These drugs are some of the most widely used
      chemotherapy drugs and are commonly used to treat breast cancer, non-small
      cell
      lung cancer and ovarian cancer. Accordingly, we believe that KRX-0402 may have
      an important role in making cells more susceptible to the damaging effects
      of
      alkylating agents, and that KRX-0402 may have utility in the treatment of
      multiple forms of cancer. KRX-0402 is usually administered intravenously. To
      date, approximately 400 patients have received KRX-0402 in multiple clinical
      studies. Dose limiting toxicity for KRX-0402 in combination with chemotherapy
      was bone marrow suppression. KRX-0402 alone has no identified dose limiting
      toxicity. Currently, we have plans to conduct additional company-sponsored
      clinical trials for KRX-0402.





***KRX-0404***





KRX-0404,
      currently in pre-clinical development, is an alkylphosphocholine, but, in
      contrast to KRX-0401, it is suitable for intravenous administration. We expect
      to continue exploring the potential utility of KRX-0404 over the next
      year.





**Neurology**





***KRX-0501***





KRX-0501
      is an orally available small molecule in pre-clinical development with the
      potential to treat neurological disorders via its unique ability to enhance
      nerve growth factor, a naturally occurring protein which is essential in the
      development and survival of certain sympathetic and sensory neurons in both
      the
      central and peripheral nervous systems. We expect to continue exploring the
      potential utility of KRX-0501 over the next year.





**COSTS
      AND TIME TO COMPLETE PRODUCT DEVELOPMENT**





The
      information below provides estimates regarding the costs associated with the
      completion of the current development phase and our current estimated range
      of
      the time that will be necessary to complete that development phase for our
      drug
      candidates. We also direct your attention to the risk factors which could
      significantly affect our ability to meet these cost and time estimates found
      in
      this report in Item 1A under the heading “Risk Factors Associated with Our
      Product Development Efforts.”





Sulonex
      is currently in Phase III and Phase IV clinical trials. We estimate that the
      cost to complete the Phase III will be approximately $20 million to $30 million,
      and we believe that the Phase III will be completed in 2007.





10


With
      respect to KRX-0401, KRX-0402 and Zerenex, we are unable to estimate the cost
      to
      complete the current phase of each drug and also unable to project a time for
      the completion of the current phase. Each of KRX-0401, KRX-0402 and Zerenex
      are
      in Phase II studies. Phase II clinical trials are highly unpredictable and
      their
      length and results will vary based on patient enrollment, response rates in
      the
      trials, and the potential need for additional trials or increases in patients
      included, among other factors. Due to the nature of a Phase II and our inability
      to predict the results of such studies, we cannot estimate when such a program
      will end, and it is equally difficult to project the cost to complete such
      phase.





KRX-0404
      and KRX-0501 are currently pre-clinical drug candidates. The timing and results
      of pre-clinical studies are highly unpredictable. Due to the nature of
      pre-clinical studies and our inability to predict the results of such studies,
      we cannot estimate when such pre-clinical development will end, and it is
      equally difficult to project the cost to complete such development.





**INTELLECTUAL
      PROPERTY AND PATENTS**





***General***





Patents
      and other proprietary rights are very important to the development of our
      business. We will be able to protect our proprietary technologies from
      unauthorized use by third parties only to the extent that our proprietary rights
      are covered by valid and enforceable patents or are effectively maintained
      as
      trade secrets. It is our intention to seek and maintain patent and trade secret
      protection for our drug candidates and our proprietary technologies. As part
      of
      our business strategy, our policy is to actively file patent applications in
      the
      United States and internationally to cover methods of use, new chemical
      compounds, pharmaceutical compositions and dosing of the compounds and
      compositions and improvements in each of these. We also rely on trade secret
      information, technical know-how, innovation and agreements with third parties
      to
      continuously expand and protect our competitive position. We have a number
      of
      patents and patent applications related to our compounds and other technology,
      but we cannot be certain that issued patents will be enforceable or provide
      adequate protection or that the pending patent applications will issue as
      patents.





Generally,
      patent applications in the United States are maintained in secrecy for a period
      of 18 months or more. Since publication of discoveries in the scientific or
      patent literature often lag behind actual discoveries, we are not certain that
      we were the first to make the inventions covered by each of our pending patent
      applications or that we were the first to file those patent applications. The
      patent positions of biotechnology and pharmaceutical companies are highly
      uncertain and involve complex legal and factual questions. Therefore, we cannot
      predict the breadth of claims allowed in biotechnology and pharmaceutical
      patents, or their enforceability. To date, there has been no consistent policy
      regarding the breadth of claims allowed in biotechnology patents. Third parties
      or competitors may challenge or circumvent our patents or patent applications,
      if issued. If
      our
      competitors prepare and file patent applications in the United States that
      claim
      technology also claimed by us, we may have to participate in interference
      proceedings declared by the United States Patent and Trademark Office to
      determine priority of invention, which could result in substantial cost, even
      if
      the eventual outcome is favorable to us. Because
      of the extensive time required for development, testing and regulatory review
      of
      a potential product, it is possible that before we commercialize any of our
      products, any related patent may expire or remain in existence for only a short
      period following commercialization, thus reducing any advantage of the patent.





If
      patents are issued to others containing preclusive or conflicting claims and
      these claims are ultimately determined to be valid, we may be required to obtain
      licenses to these patents or to develop or obtain alternative technology. Our
      breach of an existing license or failure to obtain a license to technology
      required to commercialize our products may seriously harm our business. We
      also
      may need to commence litigation to enforce any patents issued to us or to
      determine the scope and validity of third-party proprietary rights. Litigation
      would create substantial costs. An adverse outcome in litigation could subject
      us to significant liabilities to third parties and require us to seek licenses
      of the disputed rights from third parties or to cease using the technology
      if
      such licenses are unavailable.





***Sulonex***





Pursuant
      to our license for Sulonex, we initially had the rights to ten patent families,
      including nine families of issued U.S. patents and foreign counterparts, and
      one
      family of a pending U.S. patent application and foreign counterparts. We
      subsequently filed five additional U.S. patent applications and certain foreign
      counterparts relating to this product, which applications are currently pending.
      However, management has determined that several of the licensed patents were
      not
      material to our business strategy and relinquished all rights to those patents.
      The four remaining patent families currently under license cover the use of
      Sulonex or glycosaminoglycans for the treatment of diabetic nephropathy or
      retinopathy. These remaining licensed patents, and the additional patent
      applications, are being maintained throughout the territories in which they
      were
      filed.





11


Currently,
      U.S. Patent No. 5,496,807 covers the use of sulodexide to treat a patient with
      diabetic nephropathy exhibiting microalbuminuria or macroalbuminuria. This
      patent expires in 2014. The presently pending claim 1 of U.S. Patent Application
      No. 09/873,234, filed on June 4, 2001, if issued, would cover the oral
      administration of sulodexide to treat a patient with diabetic nephropathy,
      provided that the dosage of sulodexide is an effective dose of at least 200
      milligrams per day that does not cause adverse side effects. This application,
      if issued, will expire in 2021. Based on the provisions of the Patent Term
      Extension Act, we currently believe that we would qualify for patent term
      extension of at least three years, thereby extending our patent exclusivity,
      for
      the issued U.S. patent to at least 2017. We, therefore, believe that we will
      have sufficient time to commercially utilize the inventions directed to the
      treatment of diabetic nephropathy.





***Other
      Clinical-Stage Compounds, including KRX-0401***





Pursuant
      to our acquisition of ACCESS Oncology in February 2004, we have the exclusive
      commercial rights to a series of patents and patent applications in the United
      States, Canada and Mexico related to KRX-0401. These patents and patent
      applications cover composition of matter and methods of treatment. In addition,
      as a result of the acquisition, we have obtained the exclusive commercial rights
      to a series of patents and patent applications related to KRX-0402.





Pursuant
      to our license for Zerenex, we have the exclusive commercial rights to a series
      of patent applications worldwide, excluding certain Asian-Pacific countries.
      These patents and patent applications cover a method of treatment of
      hyperphosphatemia in patients with end-stage renal disease, as well as a method
      for the manufacture of Zerenex. Panion holds one use patent (expiring 2020,
      including approximately three years of expected patent term extension) and
      two
      manufacturing process patents (expiring 2023).





***Other
      Intellectual Property Rights***





We
      depend
      upon trademarks, trade secrets, know-how and continuing technological advances
      to develop and maintain our competitive position. To maintain the
      confidentiality of trade secrets and proprietary information, we require our
      employees, scientific advisors, consultants and collaborators, upon commencement
      of a relationship with us, to execute confidentiality agreements and, in the
      case of parties other than our research and development collaborators, to agree
      to assign their inventions to us. These agreements are designed to protect
      our
      proprietary information and to grant us ownership of technologies that are
      developed in connection with their relationship with us. These agreements may
      not, however, provide protection for our trade secrets in the event of
      unauthorized disclosure of such information.





In
      addition to patent protection, we may utilize orphan drug regulations to provide
      market exclusivity for certain of our drug candidates. The orphan drug
      regulations of the FDA provide incentives to pharmaceutical and biotechnology
      companies to develop and manufacture drugs for the treatment of rare diseases,
      currently defined as diseases that exist in fewer than 200,000 individuals
      in
      the United States, or, diseases that affect more than 200,000 individuals in
      the
      United States but that the sponsor does not realistically anticipate will
      generate a net profit. Under these provisions, a manufacturer of a designated
      orphan drug can seek tax benefits, and the holder of the first FDA approval
      of a
      designated orphan product will be granted a seven-year period of marketing
      exclusivity for such FDA-approved orphan product. We believe that certain of
      the
      indications for our drug candidates will be eligible for orphan drug
      designation; however, we cannot assure you that our drugs will obtain such
      orphan drug designation or will be the first to reach the market and provide
      us
      with such market exclusivity protection.





**LICENSING
      AGREEMENTS AND COLLABORATIONS**




We
      have
      formed strategic alliances with a number of companies for the manufacture and
      commercialization of our products. Our current key strategic alliances are
      discussed below.





***Alfa
      Wassermann S.p.A.***





Under
      a
      license agreement with Alfa Wassermann, we have the exclusive rights to
      sulodexide (Sulonex) for diabetic nephropathy, neuropathy and
      retinopathy in the United States, Canada, Japan, Australia, New Zealand, South
      Africa and Israel. The license entitles Alfa Wassermann to annual license fees
      and certain milestone payments. Under the license, we must use our reasonable
      best efforts to commercialize and market sulodexide. Alfa Wassermann must pay
      us
      a royalty, to the extent that it or its sub-licensees receive revenues from
      products that incorporate information or know-how that we develop. The license
      terminates upon the later of the expiration of all underlying patent rights
      or
      10 years from our first commercial sale of sulodexide.





12


***Collaborative
      Study Group***





In
      June
      2005, we announced that the CSG will be conducting our pivotal Phase III and
      Phase IV clinical program of Sulonex for the treatment of diabetic nephropathy.
      The CSG receives a monthly fee and reimbursement of expenses from us as
      compensation for its work in connection with this clinical program. The CSG
      also
      has the right to publish data arising from the clinical program. The agreement
      remains in force through June 2009, unless extended by the parties. Either
      party
      may terminate the agreement at any time upon 30 days written notice to the
      other
      party.





***Opocrin,
      S.p.A.***





Pursuant
      to a license with Opocrin, S.p.A., a private drug manufacturer, we have a
      non-exclusive worldwide license to the manufacturing process of sulodexide
      (Sulonex) for a period of twelve years from the date of the first commercial
      sale of the product. Notwithstanding this right, Opocrin shall have the right
      to
      terminate the agreement on 60 days notice in the event that we have not
      submitted an NDA to the FDA by December 31, 2007.





***AEterna
      Zentaris Inc.***





In
      September 2002, we signed a commercial license agreement with Zentaris AG,
      a
      wholly owned subsidiary of AEterna Zentaris Inc., relating to the development
      of
      KRX-0401 covering
      composition of matter and methods of treatment. This
      agreement grants us the exclusive rights to KRX-0401 in the United States,
      Canada and Mexico. Zentaris is entitled to certain royalty payments, as well
      as
      additional compensation upon successful achievement of certain milestones.
      The
      license terminates upon the later of the expiration of all underlying patent
      rights or 10 years from the first commercial sale of KRX-0401 in any of the
      covered territories. We also have the right to extend the agreement for an
      additional five years beyond the expiration of all underlying patents.





***The
      National Institutes of Health***





In
      October 2000, we entered into a worldwide, exclusive commercial sub-license
      agreement with Procept, Inc., or Procept, a wholly owned subsidiary of Paligent,
      Inc., relating to the development and marketing of KRX-0402. In March 2005,
      we
      entered into an agreement with Procept and the National Institutes of Health,
      or
      NIH, which amended the license agreement between Procept and the NIH whereby
      we
      obtained all of Procept's rights and interests, and assumed all of Procept's
      obligations, under the agreement. The NIH is entitled to certain milestone
      payments, as well as royalty payments on net sales of KRX-0402. The license
      terminates upon the expiration of all underlying patent rights.





***Panion
      & BF Biotech, Inc.***





In
      November 2005, we entered into a license agreement with Panion & BF Biotech,
      Inc., or Panion. Under the license agreement, we have acquired the exclusive
      worldwide rights, excluding certain Asian-Pacific countries, for the development
      and marketing of Zerenex.  Panion is entitled to certain milestone
      payments, as well as royalty payments on net sales of Zerenex. The license
      terminates upon the expiration of all underlying patent rights.





**COMPETITION**





Competition
      in the pharmaceutical and biotechnology industries is intense. Our
      competitors include pharmaceuticals companies and biotechnology companies,
      as
      well as universities and public and private research institutions. In addition,
      companies that are active in different but related fields represent substantial
      competition for us. Many of our competitors have significantly greater capital
      resources, larger research and development staffs and facilities and greater
      experience in drug development, regulation, manufacturing and marketing than
      we
      do. These organizations also compete with us to recruit qualified personnel,
      attract partners for joint ventures or other collaborations, and license
      technologies that are competitive with ours. To compete successfully in this
      industry we must identify novel and unique drugs or methods of treatment and
      then complete the development of those drugs as treatments in advance of our
      competitors.





The
      drugs
      that we are attempting to develop will have to compete with existing therapies.
      In addition, a large number of companies are pursuing the development of
      pharmaceuticals that target the same diseases and conditions that we are
      targeting. Other companies have products or
      drug
      candidates in various stages of pre-clinical or clinical development to treat
      diseases for which we are also seeking to discover and develop drug candidates.
      Some of these potential competing drugs are further advanced in development
      than
      our drug candidates and may be commercialized earlier.





**SUPPLY
      AND MANUFACTURING**





We
      have
      no experience in manufacturing products for clinical or commercial purposes
      and
      do not have any manufacturing facilities. We have entered into a relationship
      with a U.S.-based contract manufacturer for Sulonex which we believe will be
      adequate to satisfy our current clinical supply needs; however, as we scale-up for
      commercial manufacturing, we will need to ensure that we accurately reproduce
      the established process on a larger scale. As with all heparin-like compounds,
      the end product is highly sensitive to the manufacturing process utilized.
      Accordingly, as we scale-up, reproducibility will be required for the successful
      commercialization of Sulonex. There can be no assurance that we will be
      successful in this endeavor. Additionally, as we scale-up, we will incur capital
      expenditures to enable larger scale production.





13


The
      creation of a reproducible process is also critical in successfully sourcing
      Sulonex from multiple suppliers to create back-up manufacturing capabilities
      and/or to meet market demand. Multi-sourcing is permitted by the FDA provided
      we
      can demonstrate that the manufacturing process is the same at all suppliers
      and the product produced by them is equivalent.





The
      materials used to manufacture Sulonex, like all heparin-like compounds, are
      derived from porcine mucosa. Long-term supplies for Sulonex could be affected
      by
      limitations in the supply of porcine mucosa and the demand for other heparin
      products, over which we will have no control. Additionally, diseases affecting
      the world supply of pigs could have an actual or perceived negative impact
      on
      our ability, or the ability of our contract manufacturers, to source, make
      and/or sell Sulonex. All of these factors could materially affect the commercial
      success of Sulonex.





We
      have
      also established contract manufacturing relationships for the supply of KRX-0401
      and KRX-0402.





At
      the
      time of commercial sale, to the extent possible and commercially practicable,
      we
      plan to engage a back-up supplier for each of our product candidates. Until
      such
      time, we expect that we will rely on a single contract manufacturer to produce
      each of our product candidates under current Good Manufacturing Practice, or
      cGMP, regulations. Our third-party manufacturers have a limited numbers of
      facilities in which our product candidates can be produced and will have limited
      experience in manufacturing our product candidates in quantities sufficient
      for
      conducting clinical trials or for commercialization. Our third-party
      manufacturers will have other clients and may have other priorities that could
      affect our contractor’s ability to perform the work satisfactorily and/or on a
      timely basis. Both of these occurrences would be beyond our control.





We
      expect
      to similarly rely on contract manufacturing relationships for any products
      that
      we may in-license or acquire in the future. However, there can be no assurance
      that we will be able to successfully contract with such manufacturers on terms
      acceptable to us, or at all.





Contract
      manufacturers are subject to ongoing periodic, unannounced inspections by the
      FDA, the Drug Enforcement Agency and corresponding state agencies to ensure
      strict compliance with cGMP and other state and federal regulations. Our
      contractors in Europe face similar challenges from the numerous European Union
      and member state regulatory agencies. We do not have control over third-party
      manufacturers’ compliance with these regulations and standards, other than
      through contractual obligations.





If
      we
      need to change manufacturers, the FDA and corresponding foreign regulatory
      agencies must approve these new manufacturers in advance, which will involve
      testing and additional inspections to ensure compliance with FDA regulations
      and
      standards and may require significant lead times and delay. Furthermore,
      switching manufacturers may be difficult because the number of potential
      manufacturers is limited. It may be difficult or impossible for us to find
      a
      replacement manufacturer quickly or on terms acceptable to us, or at
      all.





**GOVERNMENT
      AND INDUSTRY REGULATION**





Numerous
      governmental authorities, principally the FDA and corresponding state and
      foreign regulatory agencies, impose substantial regulations upon the clinical
      development, manufacture and marketing of our drug candidates, as well as our
      ongoing research and development activities. None of our drug candidates have
      been approved for sale in any market in which we have marketing rights. Before
      marketing in the United States, any drug that we develop must undergo rigorous
      pre-clinical testing and clinical trials and an extensive regulatory approval
      process implemented by the FDA under the Federal Food, Drug, and Cosmetic
      Act  of
      1938,
      as amended ,
      or the Federal
      Food, Drug, and Cosmetic Act. The FDA regulates, among other things, the
      pre-clinical and clinical testing, safety, efficacy, approval, manufacturing,
      record keeping, adverse event reporting, packaging, labeling, storage,
      advertising, promotion, export, sale and distribution of biopharmaceutical
      products.





The
      regulatory review and approval process is lengthy, expensive and uncertain.
      We
      are required to submit extensive pre-clinical and clinical data and supporting
      information to the FDA for each indication or use to establish a drug
      candidate’s safety and efficacy before we can secure FDA approval. The approval
      process takes many years, requires the expenditure of substantial resources
      and
      may involve ongoing requirements for post-marketing studies or surveillance.
      Before commencing clinical trials in humans, we must submit an IND to the FDA
      containing, among other things, pre-clinical data, chemistry, manufacturing
      and
      control information, and an investigative plan. Our submission of an IND may
      not
      result in FDA authorization to commence a clinical trial.





14


The
      FDA
      may permit expedited development, evaluation, and marketing of new therapies
      intended to treat persons with serious or life-threatening conditions for which
      there is an unmet medical need under its fast track drug development programs.
      A
      sponsor can apply for fast track designation at the time of submission of an
      IND, or at any time prior to receiving marketing approval of the NDA. To receive
      fast track designation, an applicant must demonstrate:





·
            that
                the drug is intended to treat a serious or life-threatening
                condition;





·
            that
                the drug is intended to treat a serious aspect of the condition;
                and





·
            that
                the drug has the potential to address unmet medical needs, and this
                potential is being evaluated in the planned drug development
                program.





The
      FDA
      must respond to a request for fast track designation within 60 calendar days
      of
      receipt of the request. Over the course of drug development, a product in a
      fast
      track development program must continue to meet the criteria for fast track
      designation. Sponsors of products in fast track drug development programs must
      be in regular contact with the reviewing division of the FDA to ensure that
      the
      evidence necessary to support marketing approval will be developed and presented
      in a format conducive to an efficient review. Sponsors of products in fast
      track
      drug development programs ordinarily are eligible for priority review and also
      may be permitted to submit portions of an NDA to the FDA for review before
      the
      complete application is submitted. In 2001, Sulonex received fast track
      designation.





Sponsors
      of drugs designated as fast track also may seek approval under the FDA’s
      accelerated approval regulations under subpart H. Pursuant to subpart H, the
      FDA
      may grant marketing approval for a new drug product on the basis of adequate
      and
      well-controlled clinical trials establishing that the drug product has an effect
      on a surrogate endpoint that is reasonably likely, based on epidemiologic,
      therapeutic, pathophysiologic, or other evidence, to predict clinical benefit
      or
      on the basis of an effect on a clinical endpoint other than survival or
      irreversible morbidity.   Approval will be subject to the requirement that
      the applicant study the drug further to verify and describe its clinical benefit
      where there is uncertainty as to the relation of the surrogate endpoint to
      clinical benefit or uncertainty as to the relation of the observed clinical
      benefit to ultimate outcome.  Post-marketing studies are usually underway
      at the time an applicant files the NDA.  When required to be conducted,
      such post-marketing studies must also be adequate and well-controlled.  The
      applicant must carry out any such post-marketing studies with due diligence.





In
      November of 2002, we announced that the FDA agreed in principal that the NDA
      for
      Sulonex may be filed under subpart H. Final approval will be based on a
      determination by the FDA of the safety and efficacy of Sulonex based on a
      surrogate endpoint. We have submitted a subpart H clinical development plan
      to
      the FDA for the clinical development of Sulonex for diabetic nephropathy.





In
      March
      2005, we announced that we had finalized an SPA agreement with the FDA for
      the
      Phase III and Phase IV clinical trials of Sulonex. The clinical plan to support
      an NDA approval for Sulonex under subpart H, as agreed upon with the FDA under
      an SPA, consists of: (i) a single Phase III trial in patients with
      microalbuminuria based on the surrogate marker of regression of microalbuminuria
      as the primary endpoint; (ii) supportive data from previously conducted clinical
      studies; and (iii) substantial recruitment into our Phase IV confirmatory study
      that will measure clinical outcomes in patients with overt nephropathy, or
      macroalbuminuria.





The
      subpart H process is complex and requires careful execution. No assurance can
      be
      given that we will be able to meet the requirements set forth in the SPA. Even
      if we meet those requirements, the FDA is not obligated to grant approval of
      our
      NDA for Sulonex. If the FDA approves Sulonex for marketing on the basis of
      our
      Phase III trial, our Phase IV clinical trial may yield insufficient efficacy
      data or give rise to safety concerns, which could result in withdrawal of such
      approval or could cause us to withdraw the product from the market. Many
      companies who have been granted the right to utilize an accelerated approval
      approach have failed to obtain approval. Moreover, negative or inconclusive
      results from the clinical trials we hope to conduct or adverse medical events
      could cause us to have to repeat or terminate the clinical trials. Accordingly,
      we may not be able to complete the clinical trials within an acceptable time
      frame, if at all.





Clinical
      testing must meet requirements for institutional review board oversight,
      informed consent and good clinical practices, and must be conducted pursuant
      to
      an IND, unless exempted.




15


For
      purposes of NDA approval, clinical trials are typically conducted in the
      following sequential phases:





·
            *Phase
                I*:
                The drug is administered to a small group of humans, either healthy
                volunteers or patients, to test for safety, dosage tolerance, absorption,
                metabolism, excretion, and clinical pharmacology.





·
            *Phase
                II*:
                Studies are conducted on a larger number of patients to assess the
                efficacy of the product, to ascertain dose tolerance and the optimal
                dose
                range, and to gather additional data relating to safety and potential
                adverse events.





·
            *Phase
                III*:
                Studies establish safety and efficacy in an expanded patient population.





·
            *Phase
                IV*:
                The FDA may require a Phase IV to conduct post-marketing studies
                for
                purposes of gathering additional evidence of safety and
                efficacy.




The
      length of time necessary to complete clinical trials varies significantly and
      may be difficult to predict. Clinical results are frequently susceptible to
      varying interpretations that may delay, limit or prevent regulatory approvals.
      Additional factors that can cause delay or termination of our clinical trials,
      or that may increase the costs of these trials, include:





·
            slow
                patient enrollment due to the nature of the clinical trial plan,
                the
                proximity of patients to clinical sites, the eligibility criteria
                for
                participation in the study or other
                factors;





·
            inadequately
                trained or insufficient personnel at the study site to assist in
                overseeing and monitoring clinical trials or delays in approvals
                from a
                study site’s review board;





·
            longer
                treatment time required to demonstrate efficacy or determine the
                appropriate product dose;





·
            insufficient
                supply of the drug candidates;





·
            adverse
                medical events or side effects in treated patients;
                and





·
            ineffectiveness
                of the drug candidates.





In
      addition, the FDA may place a clinical trial on hold or terminate it if it
      concludes that subjects are being exposed to an unacceptable health risk. Any
      drug is likely to produce some toxicity or undesirable side effects in animals
      and in humans when administered at sufficiently high doses and/or for a
      sufficiently long period of time. Unacceptable toxicity or side effects may
      occur at any dose level at any time in the course of studies in animals designed
      to identify unacceptable effects of a drug candidate, known as toxicological
      studies, or clinical trials of drug candidates. The appearance of any
      unacceptable toxicity or side effect could cause us or regulatory authorities
      to
      interrupt, limit, delay or abort the development of any of our drug candidates
      and could ultimately prevent approval by the FDA or foreign regulatory
      authorities for any or all targeted indications.





Before
      receiving FDA approval to market a product, we must demonstrate that the product
      is safe and effective for its intended use by submitting to the FDA an NDA
      containing the pre-clinical and clinical data that have been accumulated,
      together with chemistry and manufacturing and controls specifications and
      information, and proposed labeling, among other things. The FDA may refuse
      to
      accept an NDA for filing if certain content criteria are not met and, even
      after
      accepting an NDA, the FDA may often require additional information, including
      clinical data, before approval of marketing a product.





As
      part
      of the approval process, the FDA must inspect and approve each manufacturing
      facility. Among the conditions of approval is the requirement that a
      manufacturer’s quality control and manufacturing procedures conform to cGMP.
      Manufacturers must expend time, money and effort to ensure compliance with
      cGMP,
      and the FDA conducts periodic inspections to certify compliance. It may be
      difficult for our manufacturers or us to comply with the applicable cGMP and
      other FDA regulatory requirements. If we, or our contract manufacturers, fail
      to
      comply, then the FDA will not allow us to market products that have been
      affected by the failure.





16


If
      the
      FDA grants approval, the approval will be limited to those disease states,
      conditions and patient populations for which the product is safe and effective,
      as demonstrated through clinical studies. Further, a product may be marketed
      only in those dosage forms and for those indications approved in the NDA.
      Certain changes to an approved NDA, including, with certain exceptions, any
      changes to labeling, require approval of a supplemental application before
      the
      drug may be marketed as changed. Any products that we manufacture or distribute
      pursuant to FDA approvals are subject to continuing regulation by the FDA,
      including compliance with cGMP and the reporting of adverse experiences with
      the
      drugs. The nature of marketing claims that the FDA will permit us to make in
      the
      labeling and advertising of our products will be limited to those specified
      in
      an FDA approval, and the advertising of our products will be subject to
      comprehensive regulation by the FDA. Claims exceeding those that are approved
      will constitute a violation of the Federal Food, Drug, and Cosmetic Act.
      Violations of the Federal Food, Drug, and Cosmetic Act or regulatory
      requirements at any time during the product development process, approval
      process, or after approval may result in agency enforcement actions, including
      withdrawal of approval, recall, seizure of products, injunctions, fines and/or
      civil or criminal penalties. Any agency enforcement action could have a material
      adverse effect on our business.





Should
      we
      wish to market our products outside the United States, we must receive marketing
      authorization from the appropriate regulatory authorities. The requirements
      governing the conduct of clinical trials, marketing authorization, pricing
      and
      reimbursement vary widely from country to country. At present, companies are
      typically required to apply for foreign marketing authorizations at a national
      level. However, within the European Union, registration procedures are available
      to companies wishing to market a product in more than one European Union member
      state. If the regulatory authority is satisfied that a company has presented
      adequate evidence of safety, quality and efficacy, the regulatory authority
      will
      grant a marketing authorization. This foreign regulatory approval process
      involves all of the risks associated with FDA approval discussed
      above.





Failure
      to comply with applicable federal, state and foreign laws and regulations would
      likely have a material adverse effect on our business. In addition, federal,
      state and foreign laws and regulations regarding the manufacture and sale of
      new
      drugs are subject to future changes. We cannot predict the likelihood, nature,
      effect or extent of adverse governmental regulation that might arise from future
      legislative or administrative action, either in the United States or
      abroad.





**RESEARCH
      AND DEVELOPMENT**





Company-sponsored
      research and development expenses (excluding non-cash compensation and acquired
      in-process research and development expenses) totaled $5,996,000 in 2003,
      $9,805,000 in 2004, and $24,182,000 in 2005. “Other research and development
      expenses” consist primarily of salaries and related personnel costs, fees paid
      to consultants and outside service providers for clinical and laboratory
      development, facilities-related and other expenses relating to the design,
      development, testing, and enhancement of our product candidates and
      technologies, as well as expenses related to in-licensing of new product
      candidates. See “Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations—Overview.”





**EMPLOYEES**





As
      of
      February 28, 2006, we have 29 full- and part-time employees. None of our
      employees are represented by a collective bargaining agreement, and we have
      never experienced a work stoppage. We consider our relations with our employees
      to be good.




17


**ITEM
      1A.**  **RISK
      FACTORS**




You
      should carefully consider the following risks and uncertainties. If any of
      the
      following occurs, our business, financial condition or operating results could
      be materially harmed. These factors could cause the trading price of our common
      stock to decline, and you could lose all or part of your investment.





**Risks
      Related to Our Business**





***We
      have a limited operating history and have incurred substantial operating losses
      since our inception. We expect to continue to incur losses in the future and
      may
      never become profitable.***





We
      have a
      limited operating history. You should consider our prospects in light of the
      risks and difficulties frequently encountered by early stage companies. In
      addition, we have incurred operating losses since our inception and expect
      to
      continue to incur operating losses for the foreseeable future and may never
      become profitable. As of December 31, 2005, we had an accumulated deficit of
      approximately $114.4 million. As we expand our research and development efforts,
      we will incur increasing losses. We may continue to incur substantial operating
      losses even if we begin to generate revenues from our drug candidates or
      technologies.





We
      have
      not yet commercialized any products or technologies and cannot be sure we will
      ever be able to do so. Even if we commercialize one or more of our drug
      candidates or technologies, we may not become profitable. Our ability to achieve
      profitability depends on a number of factors, including our ability to complete
      our development efforts, obtain regulatory approval for our drug candidates,
      successfully complete any post-approval regulatory obligations and successfully
      commercialize our drug candidates and technologies.





**Risks
      Associated with Our Product Development Efforts**





***If
      we are unable to successfully complete our clinical trial programs, or if such
      clinical trials take longer to complete than we project, our ability to execute
      our current business strategy will be adversely
      affected.***





Whether
      or not and how quickly we complete clinical trials is dependent in part upon
      the
      rate at which we are able to engage clinical trial sites and, thereafter, the
      rate of enrollment of patients. Patient enrollment is a function of many
      factors, including the size of the patient population, the proximity of patients
      to clinical sites, the eligibility criteria for the study, the existence of
      competitive clinical trials, and whether existing or new drugs are approved
      for
      the indication we are studying. We are aware that other companies are planning
      clinical trials that will seek to enroll patients with the same diseases as
      we
      are studying. In addition, one of our current trials for Sulonex is designed
      to
      continue until a pre-determined number of events have occurred to the patients
      enrolled. Trials such as this are subject to delays stemming from patient
      withdrawal and from lower than expected event rates and may also incur increased
      costs if enrollment is increased in order to achieve the desired number of
      events. If we experience delays in identifying and contracting with sites and/or
      in patient enrollment in our clinical trial programs, we may incur additional
      costs and delays in our development programs, and may not be able to complete
      our clinical trials on a cost-effective or timely basis.





Additionally,
      we have finalized an SPA agreement with the FDA for the Phase III and Phase
      IV
      clinical trials of Sulonex. The clinical plan to support an NDA approval for
      Sulonex under subpart H, as agreed upon with the FDA under an SPA, consists
      of:
      (i) a single Phase III trial in patients with microalbuminuria based on the
      surrogate marker of regression of microalbuminuria as the primary endpoint;
      (ii)
      supportive data from previously conducted clinical studies; and (iii)
      substantial recruitment into our Phase IV confirmatory study that will measure
      clinical outcomes in patients with overt nephropathy, or macroalbuminuria.
      The
      subpart H process is complex and requires careful execution. No assurance can
      be
      given that we will be able to meet the requirements set forth in the SPA. Even
      if we meet those requirements, the FDA is not obligated to grant approval of
      our
      NDA for Sulonex. If the FDA approves Sulonex for marketing on the basis of
      our
      Phase III trial, our Phase IV clinical trial may yield insufficient efficacy
      data or give rise to safety concerns, which could result in withdrawal of such
      approval or could cause us to withdraw the product from the market. Many
      companies who have been granted the right to utilize an accelerated approval
      approach have failed to obtain approval. Moreover, negative or inconclusive
      results from the clinical trials we hope to conduct or adverse medical events
      could cause us to have to repeat or terminate the clinical trials. Accordingly,
      we may not be able to complete the clinical trials within an acceptable time
      frame, if at all.





***If
      our drug candidates do not receive the necessary regulatory approvals, we will
      be unable to commercialize our drug candidates.***





We
      have
      not received, and may never receive, regulatory approval for the commercial
      sale
      of any of our drug candidates. We will need to conduct significant additional
      research and human testing before we can apply for product approval with the
      FDA
      or with regulatory authorities of other countries. Pre-clinical testing and
      clinical development are long, expensive and uncertain processes. Satisfaction
      of regulatory requirements typically depends on the nature, complexity and
      novelty of the product and requires the expenditure of substantial resources.
      Data obtained from pre-clinical and clinical tests can be interpreted in
      different ways, which could delay, limit or prevent regulatory approval. It
      may
      take us many years to complete the testing of our drug candidates and failure
      can occur at any stage of this process. Negative or inconclusive results or
      medical events during a clinical trial could cause us to delay or terminate
      our
      development efforts.





18


Furthermore,
      interim results of preclinical or clinical studies do not necessarily predict
      their final results, and acceptable results in early studies might not be
      obtained in later studies. Drug candidates in the later stages of clinical
      development may fail to show the desired safety and efficacy traits despite
      positive results in initial clinical testing. There can be no assurance that
      the
      results from the Phase III study will track the data from the Phase II study,
      or
      that the results from the Phase IV study will yield sufficient efficacy data.
      With respect to Sulonex, the recommendation to move into our pivotal program,
      as
      well as the announced Phase II data, may not be indicative of results from
      future clinical trials and the risk remains that the pivotal program for Sulonex
      may generate efficacy data that will be insufficient for the approval of the
      drug, or may raise safety concerns that may prevent approval of the
      drug.





Clinical
      trials also have a high risk of failure. A number of companies in the
      pharmaceutical industry, including biotechnology companies, have suffered
      significant setbacks in advanced clinical trials, even after achieving promising
      results in earlier trials. If we experience delays in the testing or approval
      process or if we need to perform more or larger clinical trials than originally
      planned, our financial results and the commercial prospects for our drug
      candidates may be materially impaired. In addition, we have limited experience
      in conducting and managing the clinical trials necessary to obtain regulatory
      approval in the United States and abroad and, accordingly, may encounter
      unforeseen problems and delays in the approval process.





***Because
      all of our proprietary technologies are licensed to us by third parties,
      termination of these license agreements would prevent us from developing our
      drug candidates.***





We
      do not
      own any of our drug candidates. We have licensed the patent rights to these
      drugs candidates from others. These license agreements require us to meet
      development or financing milestones and impose development and commercialization
      due diligence requirements on us. In addition, under these agreements, we must
      pay royalties on sales of products resulting from licensed technologies and
      pay
      the patent filing, prosecution and maintenance costs related to the licenses.
      If
      we do not meet our obligations in a timely manner or if we otherwise breach
      the
      terms of our license agreements, our licensors could terminate the agreements,
      and we would lose the rights to our drug candidates.





***We
      rely on third parties to manufacture our products. If these third parties do
      not
      successfully manufacture our products, our business will be
      harmed.***





We
      have
      no experience in manufacturing products for clinical or commercial purposes
      and
      do not have any manufacturing facilities. We intend to continue, in whole or
      in
      part, to use third parties to manufacture our products for use in clinical
      trials and for future sales. We may not be able to enter into future third-party
      contract manufacturing agreements on acceptable terms to us, if at
      all.





Contract
      manufacturers often encounter difficulties in scaling up production, including
      problems involving production yields, quality control and assurance, shortage
      of
      qualified personnel, compliance with FDA and foreign regulations, production
      costs and development of advanced manufacturing techniques and process controls.
      Our third-party manufacturers may not perform as agreed or may not remain in
      the
      contract manufacturing business for the time required by us to successfully
      produce and market our drug candidates. In addition, our contract manufacturers
      will be subject to ongoing periodic, unannounced inspections by the FDA and
      corresponding foreign governmental agencies to ensure strict compliance with,
      among other things, current good manufacturing practices, in addition to other
      governmental regulations and corresponding foreign standards. We will not have
      control over, other than by contract, third-party manufacturers' compliance
      with
      these regulations and standards. Switching or engaging multiple manufacturers
      may be difficult because the number of potential manufacturers is limited and,
      particularly in the case of Sulonex, the process by which multiple manufacturers
      make the drug substance must be identical at each manufacturing facility. It
      may
      be difficult for us to find and engage replacement or multiple manufacturers
      quickly and on terms acceptable to us, if at all. Moreover, if we need to change
      manufacturers, the FDA and corresponding foreign regulatory agencies must
      approve these manufacturers in advance, which will involve testing and
      additional inspections to ensure compliance with FDA and foreign regulations
      and
      standards.





If
      third-party manufacturers fail to deliver the required quantities of our drug
      candidates on a timely basis and at commercially reasonable prices, we will
      not
      be able to commercialize our products as planned.





19


We
      have
      entered into a relationship with a U.S.-based contract manufacturer for Sulonex
      which we believe will be adequate to satisfy our current clinical supply needs;
      however, as we scale-up for commercial manufacturing, we will need to ensure
      that we accurately reproduce the established process on a larger scale. As
      with
      all heparin-like compounds, the end product is highly sensitive to the
      manufacturing process utilized. Accordingly, as we scale-up, reproducibility
      will be required for the successful commercialization of Sulonex. There can
      be
      no assurance that we will be successful in this endeavor. Additionally, as
      we
      scale-up, we will incur capital expenditures to enable larger scale
      production.





***If
      we are not able to obtain the raw materials required for the manufacture of
      our
      lead product candidate,*** *Sulonex* ***,
      our ability to develop and market this product candidate will be substantially
      harmed.***





Source
      materials for Sulonex, our lead product candidate, are derived from porcine
      mucosa. Long-term supplies for Sulonex could be affected by limitations in
      the
      supply of porcine mucosa and the demand for other heparin products, over which
      we will have no control. Additionally, diseases affecting the world supply
      of
      pigs could have an actual or perceived negative impact on our ability, or the
      ability of our contract manufacturers, to source, make and/or sell Sulonex.
      Such
      negative impact could materially affect the commercial success of
      Sulonex.





***If
      we do not establish or maintain manufacturing, drug development and marketing
      arrangements with third parties, we may be unable to commercialize our
      products.***





We
      are an
      emerging company and do not possess all of the capabilities to fully
      commercialize our products on our own. From time to time, we may need to
      contract with third parties to:





●
            manufacture
                our product candidates;





●
            assist
                us in developing, testing and obtaining regulatory approval for and
                commercializing some of our compounds and technologies;
                and





●
            market
                and distribute our drug products.





We
      can
      provide no assurance that we will be able to successfully enter into agreements
      with such third parties on terms that are acceptable to us, if at all. If we
      are
      unable to successfully contract with third parties for these services when
      needed, or if existing arrangements for these services are terminated, whether
      or not through our actions, or if such third parties do not fully perform under
      these arrangements, we may have to delay, scale back or end one or more of
      our
      drug development programs or seek to develop or commercialize our products
      independently, which could result in delays. Furthermore, such failure could
      result in the termination of license rights to one or more of our products.
      If
      these manufacturing, development or marketing agreements take the form of a
      partnership or strategic alliance, such arrangements may provide our
      collaborators with significant discretion in determining the efforts and
      resources that they will apply to the development and commercialization of
      our
      products. Accordingly, to the extent that we rely on third parties to research,
      develop or commercialize our products, we are unable to control whether such
      products will be scientifically or commercially successful.





***Our
      reliance on third parties, such as clinical research organizations, or CROs,
      may
      result in delays in completing, or a failure to complete, clinical trials if
      they fail to perform under our agreements with them.***





In
      the
      course of product development, we engage CROs to conduct and manage clinical
      studies and to assist us in guiding our products through the FDA review and
      approval process. Because we have engaged and intend to continue to engage
      CROs
      to help us obtain market approval for our drug candidates, many important
      aspects of this process have been and will be out of our direct control. If
      the
      CROs fail to perform their obligations under our agreements with them or fail
      to
      perform clinical trials in a satisfactory manner, we may face delays in
      completing our clinical trials, as well as commercialization of one or more
      drug
      candidates. Furthermore, any loss or delay in obtaining contracts with such
      entities may also delay the completion of our clinical trials and the market
      approval of drug candidates.





**Other
      Risks Related to Our Business**





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





In
      the
      event Sulonex is approved by the FDA, we currently plan to conduct our own
      sales
      and marketing effort to support the drug, and we may adopt this strategy with
      respect to future drug products. We currently have no experience in sales,
      marketing or distribution. To directly market and distribute any products,
      we
      must build a sales and marketing organization with appropriate technical
      expertise and distribution capabilities. We may attempt to build such a sales
      and marketing organization on our own or with the assistance of a contract
      sales
      organization. For some market opportunities, we may need to enter into
      co-promotion or other licensing arrangements with larger pharmaceutical or
      biotechnology firms in order to increase the commercial success of our products.
      We may not be able to establish sales, marketing and distribution capabilities
      of our own or enter into such arrangements with third parties in a timely manner
      or on acceptable terms. To the extent that we enter into co-promotion or other
      licensing arrangements, our product revenues are likely to be lower than if
      we
      directly marketed and sold our products, and some or all of the revenues we
      receive will depend upon the efforts of third parties, and these efforts may
      not
      be successful. Additionally, building marketing and distribution capabilities
      may be more expensive than we anticipate, requiring us to divert capital from
      other intended purposes or preventing us from building our marketing and
      distribution capabilities to the desired levels.





20


***Even
      if we obtain FDA approval to market our drug products, if they fail to achieve
      market acceptance, we will never record meaningful
      revenues.***





Even
      if
      our products are approved for sale, they may not be commercially successful
      in
      the marketplace. Market acceptance of our drug products will depend on a number
      of factors, including:





●
            perceptions
                by members of the health care community, including physicians, of
                the
                safety and efficacy of our product
                candidates;





●
            the
                rates of adoption of our products by medical practitioners and the
                target
                populations for our products;





●
            the
                potential advantages that our products offer over existing treatment
                methods;





●
            the
                cost-effectiveness of our products relative to competing
                products;





●
            the
                availability of government or third-party payor reimbursement for
                our
                products;





●
            the
                side effects or unfavorable publicity concerning our products or
                similar
                products; and





●
            the
                effectiveness of our sales, marketing and distribution efforts.





Because
      we expect sales of our products, if approved, to generate substantially all
      of
      our revenues in the long-term, the failure of our drugs to find market
      acceptance would harm our business and could require us to seek additional
      financing or other sources of revenue.





***If
      our competitors develop and market products that are less expensive, more
      effective or safer than our drug products, our commercial opportunities may
      be
      reduced or eliminated.***





The
      pharmaceutical industry is highly competitive. Our competitors include
      pharmaceutical companies and biotechnology companies, as well as universities
      and public and private research institutions. In addition, companies that are
      active in different but related fields represent substantial competition for
      us.
      Many of our competitors have significantly greater capital resources, larger
      research and development staffs and facilities and greater experience in drug
      development, regulation, manufacturing and marketing than we do. These
      organizations also compete with us to recruit qualified personnel, attract
      partners for joint ventures or other collaborations, and license technologies
      that are competitive with ours. As a result, our competitors may be able to
      more
      easily develop technologies and products that could render our drug products
      obsolete or noncompetitive. To compete successfully in this industry we must
      identify novel and unique drugs or methods of treatment and then complete the
      development of those drugs as treatments in advance of our
      competitors.





The
      drugs
      that we are attempting to develop will have to compete with existing therapies.
      In addition, our commercial opportunities may be reduced or eliminated if our
      competitors develop and market products that are less expensive, more effective
      or safer than our drug products. Other companies have drug candidates in various
      stages of pre-clinical or clinical development to treat diseases for which
      we
      are also seeking to discover and develop drug products. Some of these potential
      competing drugs are further advanced in development than our drug candidates
      and
      may be commercialized earlier. Even if we are successful in developing effective
      drugs, our products may not compete successfully with products produced by
      our
      competitors.





21


***If
      we lose our key personnel or are unable to attract and retain additional
      personnel, our operations could be disrupted and our business could be
      harmed.***





As
      of
      February 28, 2006, we had 29 full and part-time employees. To successfully
      develop our drug candidates, we must be able to attract and retain highly
      skilled personnel. In addition, if we lose the services of our current
      personnel, in particular, Michael S. Weiss, our Chairman and Chief Executive
      Officer, our ability to continue to execute on our business plan could be
      materially impaired. In addition, although we have an employment agreement
      with
      Mr. Weiss, this agreement does not prevent him from terminating his employment
      with us.





***Any
      acquisitions we make may require a significant amount of our available cash
      and
      may not be scientifically or commercially successful.***





As
      part
      of our business strategy, we may effect acquisitions to obtain additional
      businesses, products, technologies, capabilities and personnel. If we make
      one
      or more significant acquisitions in which the consideration includes cash,
      we
      may be required to use a substantial portion of our available cash.





Acquisitions
      involve a number of operational risks, including:





●
            difficulty
                and expense of assimilating the operations, technology and personnel
                of
                the acquired business;





●
            our
                inability to retain the management, key personnel and other employees
                of
                the acquired business;





●
            our
                inability to maintain the acquired company's relationship with key
                third
                parties, such as alliance partners;





●
            exposure
                to legal claims for activities of the acquired business prior to
                the
                acquisition;





●
            the
                diversion of our management's attention from our core business;
                and





●
            the
                potential impairment of goodwill and write-off of in-process research
                and
                development costs, adversely affecting our reported results of
                operations.





***The
      status of reimbursement from third-party payors for newly approved health care
      drugs is uncertain and failure to obtain adequate reimbursement could limit
      our
      ability to generate revenue.***





Our
      ability to commercialize pharmaceutical products may depend, in part, on the
      extent to which reimbursement for the products will be available
      from:





●
            government
                and health administration authorities;





●
            private
                health insurers;





●
            managed
                care programs; and





●
            other
                third-party payors.





Significant
      uncertainty exists as to the reimbursement status of newly approved health
      care
      products. Third-party payors, including Medicare, are challenging the prices
      charged for medical products and services. Government and other third-party
      payors increasingly are attempting to contain health care costs by limiting
      both
      coverage and the level of reimbursement for new drugs and by refusing, in some
      cases, to provide coverage for uses of approved products for disease indications
      for which the FDA has not granted labeling approval. Third-party insurance
      coverage may not be available to patients for our products. If government and
      other third-party payors do not provide adequate coverage and reimbursement
      levels for our products, their market acceptance may be reduced.





***Health
      care reform measures could adversely affect our
      business.***





The
      business and financial condition of pharmaceutical and biotechnology companies
      are affected by the efforts of governmental and third-party payors to contain
      or
      reduce the costs of health care. In the United States and in foreign
      jurisdictions there have been, and we expect that there will continue to be,
      a
      number of legislative and regulatory proposals aimed at changing the health
      care
      system, such as those relating to reimportation of drugs into the U.S. from
      other countries where they are sold at a lower price and government control
      of
      prescription drug pricing. The pendency or approval of such proposals could
      result in a decrease in our stock price or limit our ability to raise capital
      or
      to obtain strategic partnerships or licenses.





22


***We
      face product liability risks and may not be able to obtain adequate
      insurance.***





The
      use
      of our drug candidates in clinical trials, and the future sale of any approved
      products, exposes us to liability claims. Although we are not aware of any
      historical or anticipated product liability claims against us, if we cannot
      successfully defend ourselves against product liability claims, we may incur
      substantial liabilities or be required to cease clinical trials of our drug
      candidates or limit commercialization of any approved products.





We
      believe that we have obtained sufficient product liability insurance coverage
      for our clinical trials. We intend to expand our insurance coverage to include
      the commercial sale of any approved products if marketing approval is obtained;
      however, insurance coverage is becoming increasingly expensive. We may not
      be
      able to maintain insurance coverage at a reasonable cost. We may not be able
      to
      obtain additional insurance coverage that will be adequate to cover product
      liability risks that may arise. Regardless of merit or eventual outcome, product
      liability claims may result in:





●
            decreased
                demand for a product;





●
            injury
                to our reputation;





●
            our
                inability to continue to develop a drug candidate;





●
            withdrawal
                of clinical trial volunteers; and





●
            loss
                of revenues.





Consequently,
      a product liability claim or product recall may result in losses that could
      be
      material.





***In
      connection with providing our clinical trial management and site recruitment
      services, we may be exposed to liability that could have a material adverse
      effect on our financial condition and results of
      operations.***





The
      Online Collaborative Oncology Group, Inc., or OCOG, a subsidiary we acquired
      through our acquisition of ACCESS Oncology, provides clinical trial management
      and site recruitment services to us as well as other biotechnology and
      pharmaceutical companies. In conducting the activities of OCOG, any failure
      on
      our part to comply with applicable governmental regulations or contractual
      obligations could expose us to liability to our clients and could have a
      material adverse effect on us. We also could be held liable for errors or
      omissions in connection with the services we perform. In addition, the wrongful
      or erroneous delivery of health care information or services may expose us
      to
      liability. If we were required to pay damages or bear the costs of defending
      any
      such claims, the losses could be material.





***Our
      corporate compliance efforts cannot guarantee that we are in compliance with
      all
      potentially applicable regulations.***





The
      development, manufacturing, pricing, sales, and reimbursement of our products,
      together with our general operations, are subject to extensive regulation by
      federal, state and other authorities within the United States and numerous
      entities outside of the United States. We are a relatively small company with
      29
      employees. We also have significantly fewer employees than many other companies
      that have a product candidate in late-stage clinical development, and we rely
      heavily on third parties to conduct many important functions. While we have
      developed and instituted a corporate compliance program based on what we believe
      are the current best practices, we cannot assure you that we are or will be
      in
      compliance with all potentially applicable regulations. If we fail to comply
      with any of these regulations we could be subject to a range of regulatory
      actions, including suspension or termination of clinical trials, the failure
      to
      approve a product candidate, restrictions on our products or manufacturing
      processes, withdrawal of products from the market, significant fines, or other
      sanctions or litigation.





**Risks
      Related to Our Financial Condition**





***Our
      current cash, cash equivalents and investment securities may not be adequate
      to
      support our operations for the next 24 months as we have
      estimated.***





We
      believe that our $100.7 million in cash, cash equivalents, interest receivable
      and investment securities as of December 31, 2005 will be sufficient to enable
      us to meet our planned operating needs and capital expenditures for at least
      the
      next 24 months. Our forecast of the period of time through which our cash,
      cash
      equivalents, interest receivable and investment securities will be adequate
      to
      support our operations is a forward-looking statement that involves risks and
      uncertainties. The actual amount of funds we will need to operate is subject
      to
      many factors, some of which are beyond our control. These factors include the
      following:





23


●
            the
                timing of expenses associated with manufacturing and product development
                of the proprietary drug candidates within our portfolio and those
                that may
                be in-licensed, partnered or
                acquired;





●
            the
                timing of the in-licensing, partnering and acquisition of new product
                opportunities;





●
            the
                progress of the development efforts of parties with whom we have
                entered,
                or may enter, into research and development
                agreements;





●
            our
                ability to achieve our milestones under our licensing arrangements;
                and





●
            the
                costs involved in prosecuting and enforcing patent claims and other
                intellectual property rights.





***If
      we are unable to obtain additional funds on terms favorable to us, or at all,
      our business would be harmed.***





We
      expect
      to use, rather than generate, funds from operations for the foreseeable future.
      Based on our current plans, we believe our existing cash and cash equivalents,
      interest receivable and investment securities will be sufficient to fund our
      operating expenses and capital requirements for at least the next 24 months;
      however, the actual amount of funds that we will need prior to or after that
      date will be determined by many factors, some of which are beyond our control.
      As a result, we may need funds sooner or in different amounts than we currently
      anticipate, depending upon:





●
            the
                progress of our development activities;





●
            the
                progress of our research activities;





●
            the
                number and scope of our development programs;





●
            the
                costs associated with commercialization activities, including
                manufacturing, marketing and sales;





●
            our
                ability to establish and maintain current and new licensing or acquisition
                arrangements;





●
            our
                ability to achieve our milestones under our licensing
                arrangements;





●
            the
                costs involved in enforcing patent claims and other intellectual
                property
                rights; and





●
            the
                costs and timing of regulatory approvals.





If
      our
      capital resources are insufficient to meet future capital requirements, we
      will
      have to raise additional funds. If we are unable to obtain additional funds
      on
      terms favorable to us or at all, we may be required to cease or reduce our
      operating activities or sell or license to third parties some or all of our
      intellectual property. If we raise additional funds by selling additional shares
      of our capital stock, the ownership interests of our stockholders will be
      diluted. If we need to raise additional funds through the sale or license of
      our
      intellectual property, we may be unable to do so on terms favorable to
      us.





***Our
      prior restructurings may result in additional Israeli-related
      liabilities.***





In
      July
      2003, our Israeli subsidiary vacated its Jerusalem facility, after giving
      advance notice to the landlord. On May 1, 2005, the landlord of the Jerusalem
      facility filed suit in Israel claiming that we were liable as a result of the
      alleged breach of the lease agreement by our subsidiary. The amount demanded
      by
      the landlord totals 4,345,313 NIS or approximately $946,000 at the December
      31,
      2005 exchange rate, and includes rent for the entire remaining term of the
      lease, as well as property taxes and other costs allegedly incurred by the
      landlord. In August 2003, the landlord claimed a bank deposit, in the amount
      of
      $222,000, which was previously provided as security in connection with the
      lease
      agreement. We intend to vigorously defend the suit. In July 2005, Keryx (Israel)
      Ltd. and Keryx Biomedical Technologies Ltd. filed an answer to the landlord’s
      complaint. In October 2005, Keryx Biopharmaceuticals, Inc. filed an answer
      to
      the landlord’s complaint. Generally, each answer challenges the merits of the
      landlord’s cause of action as to each defendant.  All defendants, except
      Keryx (Israel) Ltd., have also filed a motion to dismiss the complaint. The
      plaintiff has filed a response to each answer and a hearing date has been set
      by
      the Circuit Court of Jerusalem. To date, we have not yet recorded a charge
      to
      reflect any potential liability associated with this lawsuit as it is too early
      to accurately estimate the amount of the charge, if any.





24


In
      September 2001, one of our Israeli subsidiaries received the status of an
      "Approved Enterprise," a status which grants certain tax benefits in Israel
      in
      accordance with the "Law for the Encouragement of Capital Investments, 1959."
      Through December 31, 2003, our Israeli subsidiary, which ceased operations
      in
      2003, has received tax benefits in the form of exemptions of approximately
      $744,000 as a result of our subsidiary's status as an "Approved Enterprise."
      As
      part of the restructuring implemented during 2003, we closed down our Jerusalem
      laboratory facility. In October 2003, the subsidiary received a letter from
      the
      Israeli Ministry of Industry and Trade that its Approved Enterprise status
      was
      cancelled as of July 2003 and that past benefits would not need to be repaid.
      The Israeli tax authorities have yet to confirm this position; however, we
      believe that, based on the letter received from the Ministry of Industry and
      Trade, it is unlikely that past benefits will need to be repaid, and therefore,
      we have not recorded any charge with respect to this potential liability. There
      can be no assurances that the Israeli tax authorities will confirm this
      position. As a result, we may be liable to repay some or all of the tax benefits
      received to date, which could adversely affect our cash flow and results of
      operations.





**Risks
      Related to Our Intellectual Property**





***If
      we are unable to adequately protect our intellectual property, third parties
      may
      be able to use our intellectual property, which could adversely affect our
      ability to compete in the market.***





Our
      commercial success will depend in part on our ability and the ability of our
      licensors to obtain and maintain patent protection on our drug products and
      technologies and successfully defend these patents against third-party
      challenges. The patent positions of pharmaceutical and biotechnology companies
      can be highly uncertain and involve complex legal and factual questions. No
      consistent policy regarding the breadth of claims allowed in biotechnology
      patents has emerged to date. Accordingly, the patents we use may not be
      sufficiently broad to prevent others from practicing our technologies or from
      developing competing products. Furthermore, others may independently develop
      similar or alternative drug products or technologies or design around our
      patented drug products and technologies. The patents we use may be challenged
      or
      invalidated or may fail to provide us with any competitive
      advantage.





We
      rely
      on trade secrets to protect our intellectual property where we believe patent
      protection is not appropriate or obtainable. Trade secrets are difficult to
      protect. While we require our employees, collaborators and consultants to enter
      into confidentiality agreements, this may not be sufficient to adequately
      protect our trade secrets or other proprietary information. In addition, we
      share ownership and publication rights to data relating to some of our drug
      products and technologies with our research collaborators and scientific
      advisors. If we cannot maintain the confidentiality of this information, our
      ability to receive patent protection or protect our trade secrets or other
      proprietary information will be at risk.





***Litigation
      or third-party claims of intellectual property infringement could require us
      to
      spend substantial time and money defending such claims and adversely affect
      our
      ability to develop and commercialize our products.***





Third
      parties may assert that we are using their proprietary intellectual property
      without authorization. In addition, third parties may have or obtain patents
      in
      the future and claim that our drug products or technologies infringe their
      patents. If we are required to defend against patent suits brought by third
      parties, or if we sue third parties to protect our patent rights, we may be
      required to pay substantial litigation costs, and our management's attention
      may
      be diverted from operating our business. In addition, any legal action against
      our licensors or us that seeks damages or an injunction of our commercial
      activities relating to the affected our drug products or technologies could
      subject us to monetary liability and require our licensors or us to obtain
      a
      license to continue to use the affected our drug products or technologies.
      We
      cannot predict whether our licensors or we would prevail in any of these types
      of actions or that any required license would be made available on commercially
      acceptable terms, if at all.





**Risks
      Related to Our Common Stock**





***Concentration
      of ownership of our common stock among our existing executive officers,
      directors and principal stockholders may prevent new investors from influencing
      significant corporate decisions.***





As
      of
      December 31, 2005, our executive officers, directors and principal stockholders
      (including their affiliates) beneficially owned, in the aggregate, approximately
      21.7% of our outstanding common stock, including, for this purpose, currently
      exercisable options and warrants held by our executive officers, directors
      and
      principal stockholders. As a result, these persons, acting together, may have
      the ability to significantly influence the outcome of all matters submitted
      to
      our stockholders for approval, including the election and removal of directors
      and any merger, consolidation or sale of all or substantially all of our assets.
      In addition, such persons, acting together, may have the ability to effectively
      control our management and affairs. Accordingly, this concentration of ownership
      may depress the market price of our common stock.





25


***Future
      sales or other issuances of our common stock could depress the market for our
      common stock.***





Sales
      of
      a substantial number of shares of our common stock, or the perception by the
      market that those sales could occur, could cause the market price of our common
      stock to decline or could make it more difficult for us to raise funds through
      the sale of equity in the future. On December 30, 2005, we filed with the SEC
      a
      shelf registration statement on Form S-3, that was declared effective by the
      SEC
      on January 13, 2006, providing for the offering of up to $150 million of our
      common stock. Future sales pursuant to this registration statement could depress
      the market for our common stock.





If
      we
      make one or more significant acquisitions in which the consideration includes
      stock or other securities, your equity in us may be significantly diluted.
      We
      may be required to issue up to 3,372,422 shares of our common stock to former
      stockholders of ACCESS Oncology upon the achievement of certain milestones.
      In
      addition, we may enter into arrangements with third parties permitting us to
      issue shares of common stock in lieu of certain cash payments upon the
      achievement of milestones.





As
      of
      December 31, 2005, our executive officers, directors, and principal stockholders
      beneficially own, in the aggregate, approximately 21.7% of our common stock,
      including currently exercisable warrants and options held by them. If some
      or
      all of them should decide to sell a substantial number of their holdings, it
      could have a material adverse effect on the market for our common
      stock.





***Our
      stock price can be volatile, which increases the risk of litigation, and may
      result in a significant decline in the value of your
      investment.***





The
      trading price of our common stock is likely to be highly volatile and subject
      to
      wide fluctuations in price in response to various factors, many of which are
      beyond our control. These factors include:





●
            developments
                concerning our drug candidates;





●
            announcements
                of technological innovations by us or our competitors;





●
            introductions
                or announcements of new products by us or our
                competitors;





●
            announcements
                by us of significant acquisitions, strategic partnerships, joint
                ventures
                or capital commitments;





●
            changes
                in financial estimates by securities analysts;





●
            actual
                or anticipated variations in quarterly operating results;





●
            expiration
                or termination of licenses, research contracts or other collaboration
                agreements;





●
            conditions
                or trends in the regulatory climate and the biotechnology and
                pharmaceutical industries;





●
            changes
                in the market valuations of similar companies; and





●
            additions
                or departures of key personnel.





In
      addition, equity markets in general, and the market for biotechnology and life
      sciences companies in particular, have experienced extreme price and volume
      fluctuations that have often been unrelated or disproportionate to the operating
      performance of companies traded in those markets. These broad market and
      industry factors may materially affect the market price of our common stock,
      regardless of our development and operating performance. In the past, following
      periods of volatility in the market price of a company's securities, securities
      class-action litigation has often been instituted against that company. Such
      litigation, if instituted against us, could cause us to incur substantial costs
      to defend such claims and divert management's attention and resources, which
      could seriously harm our business.





26


***Certain
      anti-takeover provisions in our charter documents and Delaware law could make
      a
      third-party acquisition of us difficult. This could limit the price investors
      might be willing to pay in the future for our common
      stock.***





Provisions
      in our amended and restated certificate of incorporation and bylaws could have
      the effect of making it more difficult for a third party to acquire, or of
      discouraging a third party from attempting to acquire, or control us. These
      factors could limit the price that certain investors might be willing to pay
      in
      the future for shares of our common stock. Our amended and restated certificate
      of incorporation allows us to issue preferred stock with rights senior to those
      of the common stock. The issuance of preferred stock could decrease the amount
      of earnings and assets available for distribution to the holders of our common
      stock or could adversely affect the rights and powers, including voting rights,
      of such holders. In certain circumstances, such issuance could have the effect
      of decreasing the market price of our common stock. Our amended and restated
      bylaws eliminate the right of stockholders to call a special meeting of
      stockholders, which could make it more difficult for stockholders to effect
      certain corporate actions. Any of these provisions could also have the effect
      of
      delaying or preventing a change in control.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None.





**ITEM
      2. PROPERTIES.**





Our
      corporate and executive office is located in New York, New York. Our New York
      facility consists of approximately 11,700 square feet of leased space at 750
      Lexington Avenue, New York, New York 10022. We are also currently leasing
      approximately 2,500 square feet of space in the San Francisco, California area,
      to accommodate our oncology group.





**ITEM
      3. LEGAL PROCEEDINGS.**





We,
      and
      our subsidiaries, are not a party to, and our property is not the subject of,
      any material pending legal proceedings, other than as noted below.





In
      July
      2003, Keryx (Israel) Ltd., one of our Israeli subsidiaries, vacated its
      Jerusalem facility, after giving advance notice to RMPA Properties Ltd., the
      landlord.  On May 1, 2005, the landlord filed suit in the Circuit Court of
      Jerusalem in Jerusalem, Israel, claiming that Keryx (Israel) Ltd., among other
      parties, was liable as a result of the alleged breach of the lease
      agreement.  In addition to Keryx (Israel) Ltd., the landlord brought suit
      against Keryx Biomedical Technologies Ltd., another of our Israeli subsidiaries,
      Keryx Biopharmaceuticals, Inc., Michael S. Weiss, our Chairman and Chief
      Executive Officer, and Robert Trachtenberg, a former employee of Keryx. 
The amount demanded by the landlord totals 4,345,313 NIS or approximately
      $946,000 at the December 31, 2005, exchange rate, and includes rent for the
      entire remaining term of the lease, as well as property taxes and other costs
      allegedly incurred by the landlord. In August 2003, the landlord claimed a
      bank
      deposit, in the amount of $222,000, which was previously provided as security
      in
      connection with the lease agreement.  We intend to vigorously defend the
      suit. In July 2005, Keryx (Israel) Ltd. and Keryx Biomedical Technologies Ltd.
      filed an answer to the landlord’s complaint.  In October 2005, Keryx
      Biopharmaceuticals, Inc. filed an answer to the landlord’s complaint. 
Generally, each answer challenges the merits of the landlord’s cause of action
      as to each defendant. All defendants, except Keryx (Israel) Ltd., have also
      filed a motion to dismiss the complaint. The plaintiff has filed a response
      to
      each answer and a hearing date has been set by the Circuit Court of Jerusalem.
      To date, we have not yet recorded a charge to reflect any potential liability
      associated with this lawsuit, as it is too early to accurately estimate the
      amount of the charge, if any.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**





We
      did
      not submit any matters to a vote of our security holders, through the
      solicitation of proxies or otherwise, during the fourth quarter of
      2005.





**PART
      II**





**ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.**





***Market
      Information***





Our
      common stock is listed on the Nasdaq National Market and trades under the symbol
      “KERX.” Trading of our common stock commenced on July 28, 2000, following the
      completion of our initial public offering.





27


The
      following table sets forth the high and low closing sale prices of our common
      stock for the periods indicated.





**Fiscal
                Year Ended December 31, 2005**
            
            **High**
            
            **Low**Fourth
                Quarter
            
            $
            17.90
            
            $
            13.09Third
                Quarter
            
            $
            17.71
            
            $
            13.23Second
                Quarter
            
            $
            14.49
            
            $
            11.74First
                Quarter
            
            $
            15.38
            
            $
            10.77





**Fiscal
                Year Ended December 31, 2004**
            
            **High**
            
            **Low**Fourth
                Quarter
            
            $
            13.80
            
            $
            9.65Third
                Quarter
            
            $
            12.90
            
            $
            7.13Second
                Quarter
            
            $
            19.07
            
            $
            10.57First
                Quarter
            
            $
            15.42
            
            $
            4.59





***Holders***





The
      number of record holders of our common stock as of February 28, 2006 was 52.





***Dividends***





We
      have
      never declared or paid any cash dividends on our common stock and do not
      anticipate paying any cash dividends in the foreseeable future. Any future
      determination to pay dividends will be at the discretion of our board of
      directors.





***Securities
      Authorized for Issuance Under Equity Compensation
      Plans***





The
      following table provides information as of December 31, 2005, regarding the
      securities authorized for issuance under our equity compensation plans,
      consisting of the 1999 Stock Option Plan, as amended, the 2000 Stock Option
      Plan, as amended, the Non-Plan, the 2002 CEO Incentive Stock Option Plan, the
      2004 President Incentive Plan and the 2004 Long-Term Incentive
      Plan.





**Equity
                Compensation Plan
                Information****Plan
                Category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))****(a)**
            
            **(b)**
            
            **(c)**Equity
                compensation plans approved by security holders
            
            
            4,961,995
            
            $
            4.51
            
            
            3,361,822Equity
                compensation plans not approved by security holders
            
            
            3,384,633
            
            $
            2.57
            
            
            22,500Total
            
            
            8,346,628
            
            $
            3.72
            
            
            3,384,322





For
      information about all of our stock option plans, see Note 7 to our Consolidated
      Financial Statements .




**ITEM
      6. SELECTED FINANCIAL DATA.**





The
      following Statement of Operations Data for the years ended December 31, 2005,
      2004, 2003, 2002 and 2001, and Balance Sheet Data as of December 31, 2005,
      2004,
      2003, 2002 and 2001, as set forth below are derived from our audited
      consolidated financial statements. This financial data should be read in
      conjunction with “Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” and “Item 8. Financial Statements and
      Supplementary Data.”





28





**Years
                ended December 31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**(in
                thousands, except per share data)**Statement
                of Operations Data:****Service
                revenue**
            
            $
            574
            
            $
            809
            
            $
            --
            
            $
            --
            
            $
            --**Operating
                expenses:**Cost
                of services
            
            
            819
            
            
            835
            
            
            --
            
            
            --
            
            
            --Research
                and development:Non-cash
                compensation
            
            
            594
            
            
            413
            
            
            (486
            )
            
            (1,382
            )
            
            (17
            )Non-cash
                acquired in-process research
              and
                development
            
            
            --
            
            
            18,800
            
            
            --
            
            
            --
            
            
            --Other
                research and development
            
            
            24,182
            
            
            9,805
            
            
            5,996
            
            
            9,523
            
            
            7,416Total
                research and development
            
            
            24,776
            
            
            29,018
            
            
            5,510
            
            
            8,141
            
            
            7,399General
                and administrative:Non-cash
                compensation
            
            
            775
            
            
            1,087
            
            
            188
            
            
            (4
            )
            
            139Other
                general and administrative
            
            
            3,416
            
            
            3,581
            
            
            3,684
            
            
            4,108
            
            
            4,302Total
                general and administrative
            
            
            4,191
            
            
            4,668
            
            
            3,872
            
            
            4,104
            
            
            4,441**Total
                operating expenses**
            
            
            29,786
            
            
            34,521
            
            
            9,382
            
            
            12,245
            
            
            11,840**Operating
                loss**
            
            
            (29,212
            )
            
            (33,712
            )
            
            (9,382
            )
            
            (12,245
            )
            
            (11,840
            )**Other
                income (expense):**Interest
                and other income, net
            
            
            2,317
            
            
            770
            
            
            247
            
            
            513
            
            
            2,231Income
                taxes
            
            
            --
            
            
            (1
            )
            
            27
            
            
            (51
            )
            
            (197
            )**Net
                loss**
            
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (9,108
            )
            $
            (11,783
            )
            $
            (9,806
            )**Net
                loss per common share**Basic
                and diluted
            
            $
            (0.78
            )
            $
            (1.10
            )
            $
            (0.43
            )
            $
            (0.59
            )
            $
            (0.50
            )




**As
                of December
                31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**(in
                thousands)**Balance
                Sheet Data:**Cash,
                cash equivalents, interest receivable
              and
                investment securities
            
            $
            100,733
            
            $
            49,878
            
            $
            31,414
            
            $
            24,131
            
            $
            37,856Working
                capital
            
            
            83,890
            
            
            46,538
            
            
            30,982
            
            
            22,350
            
            
            35,235Total
                assets
            
            
            105,097
            
            
            50,862
            
            
            32,223
            
            
            29,103
            
            
            43,067Long-term
                obligations
            
            
            322
            
            
            92
            
            
            --
            
            
            256
            
            
            766Contingent
                equity rights
            
            
            4,004
            
            
            4,004
            
            
            --
            
            
            --
            
            
            --Total
                stockholders’ equity
            
            
            94,678
            
            
            42,804
            
            
            31,226
            
            
            26,330
            
            
            39,215




29


**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.**





The
      following discussion and analysis contains forward-looking statements about
      our
      plans and expectations of what may happen in the future. Forward-looking
      statements are based on a number of assumptions and estimates that are
      inherently subject to significant risks and uncertainties, and our results
      could
      differ materially from the results anticipated by our forward-looking statements
      as a result of many known or unknown factors, including, but not limited to,
      those factors discussed in “Item 1A. Risk Factors.” See also the “Special
      Cautionary Notice Regarding Forward-Looking Statements” set forth at the
      beginning of this report





You
      should read the following discussion and analysis in conjunction with “Item 6.
      Selected Financial Data,” “Item 8. Financial Statements and Supplementary Data,”
and our consolidated financial statements appearing elsewhere in this
      report.





**Overview**





We
      are a
      biopharmaceutical company focused on the acquisition, development and
      commercialization of novel pharmaceutical products for the treatment of
      life-threatening diseases, including diabetes and cancer. Our lead compound
      under development is SulonexTM (sulodexide), which we previously referred to as
      KRX-101, a first-in-class, oral heparinoid compound for the treatment of
      diabetic nephropathy, a life-threatening kidney disease caused by diabetes.
      Sulonex is in a pivotal Phase III and Phase IV clinical program under a Special
      Protocol Assessment, or SPA, with the Food & Drug Administration, or FDA.
      Additionally, we are developing ZerenexTM, an oral, inorganic, iron-based
      compound that has the capacity to bind to phosphorous and form non-absorbable
      complexes. Zerenex is currently in Phase II clinical development for the
      treatment of hyperphosphatemia (elevated phosphate levels) in patients with
      end-stage renal disease, or ESRD. We are also developing clinical-stage oncology
      compounds, including KRX-0401, a novel, first-in-class, oral anti-cancer agent
      that modulates Akt, a protein in the body associated with tumor survival and
      growth, and a number of other key signal transduction pathways, including the
      JNK and MAPK pathways, which are pathways associated with programmed cell death,
      cell growth, cell differentiation and cell survival. KRX-0401 is currently
      in
      Phase II clinical development for multiple tumor types. We also have an active
      in-licensing and acquisition program designed to identify and acquire additional
      drug candidates. To date, we have not received approval for the sale of any
      of
      our drug candidates in any market and, therefore, have not generated any
      revenues from our drug candidates.





We
      are a
      development stage company and have no product sales to date. Our major sources
      of working capital have been proceeds from various private placements of equity
      securities, option and warrant exercises, and from public offerings of our
      common stock. We have devoted substantially all of our efforts to the discovery,
      in-licensing and development of drug candidates. We have incurred negative
      cash
      flow from operations each year since our inception. We anticipate incurring
      negative cash flows from operating activities for the foreseeable future. We
      have spent, and expect to continue to spend, substantial amounts in connection
      with implementing our business strategy, including our product development
      efforts, our clinical trials and in-licensing and acquisition activities.





Our
      revenues consist entirely of clinical trial management and site recruitment
      services. Revenues from providing these services are recognized as the services
      are provided. Deferred revenue is recorded when we receive a deposit or
      prepayment for services to be performed at a later date. We have not earned
      any
      revenues from the commercial sale of any of our drug candidates.





Our
      cost
      of services consist of all costs specifically associated with our clinical
      trial
      management and site recruitment client programs such as salaries, benefits
      paid
      to personnel, payments to third-party vendors and systems and other support
      facilities associated with delivering services to our clients. Cost of services
      are recognized as services are performed.





Our
      research and development expenses consist primarily of salaries and related
      personnel costs, fees paid to consultants and outside service providers for
      clinical and laboratory development, facilities-related and other expenses
      relating to the design, development, testing, and enhancement of our product
      candidates and technologies, as well as expenses related to in-licensing of
      new
      product candidates. We expense our research and development costs as they are
      incurred. Other research and development expenses, which excludes non-cash
      compensation and acquired in-process research and development expenses, for
      the
      years ended December 31, 2005, 2004 and 2003 were $24,182,000, $9,805,000,
      and
      $5,996,000, respectively.





The
      following table sets forth the other research and development expenses per
      project, for the periods presented.




30


**Years
                ended December 31,****2005**
            
            **2004**
            
            **2003**
            
            **Amounts
                accumulated during the**
              **development
                stage**Sulonex
            
            $
            16,075,000
            
            $
            6,064,000
            
            $
            2,074,000
            
            $
            30,279,000KRX-0401
            
            
            5,394,000
            
            
            2,230,000
            
            
            N/A
            
            
            7,624,000Other
                clinical stage compounds
            
            
            1,593,000
            
            
            623,000
            
            
            N/A
            
            
            2,216,000Other
            
            
            1,120,000
            
            
            888,000
            
            
            3,922,000
            
            
            23,775,000Total
            
            $
            24,182,000
            
            $
            9,805,000
            
            $
            5,996,000
            
            $
            63,894,000




Our
      general and administrative expenses consist primarily of salaries and related
      expenses for executive, finance and other administrative personnel, recruitment
      expenses, professional fees and other corporate expenses, including investor
      relations, general legal activities and facilities related expenses.





Our
      results of operations include non-cash compensation expense as a result of
      the
      grants of stock options and warrants. Compensation expense for fixed award
      options and warrants granted to employees and directors represents the intrinsic
      value (the difference between the stock price of the common stock and the
      exercise price of the options or warrants) of the options and warrants at the
      date of grant. For variable awards, we consider the difference between the
      stock
      price at reporting date and the exercise price, in the case where a measurement
      date has not been reached. The compensation cost is recorded over the respective
      vesting periods of the individual stock options and warrants. The expense is
      included in the respective categories of expense in the statement of operations.
      We expect to incur significant non-cash compensation expense in the future;
      however, because some of the options and warrants issued to employees,
      consultants and other third-parties either do not vest immediately or vest
      upon
      the achievement of certain milestones, the total expense is uncertain.





Our
      ongoing clinical trials will be lengthy and expensive. Even if these trials
      show
      that our drug candidates are effective in treating certain indications, there
      is
      no guarantee that we will be able to record commercial sales of any of our
      product candidates in the near future. In addition, we expect losses to continue
      as we continue to fund in-licensing and development of new drug candidates.
      As
      we continue our development efforts, we may enter into additional third-party
      collaborative agreements and may incur additional expenses, such as licensing
      fees and milestone payments. In addition, we will need to establish the
      commercial infrastructure required to manufacture, market and sell our drug
      candidates following approval, if any, by the FDA, which would result in us
      incurring additional expenses. As a result, our quarterly results may fluctuate
      and a quarter-by-quarter comparison of our operating results may not be a
      meaningful indication of our future performance.





**RESULTS
      OF OPERATIONS**





**Years
      Ended December 31, 2005 and 2004**





*Revenue.*  Service
      revenue decreased by $235,000 to $574,000 for the year ended December 31, 2005,
      as compared to revenue of $809,000 for the year ended December 31, 2004. The
      decrease in service revenue was primarily due to a reduction in service
      contracts in 2005 as compared to 2004. We
      do not
      expect our service revenue to have a material impact on our financial results
      during the next fiscal year.





*Cost
      of Services Expense* . Cost
      of
      services expense decreased by $16,000 to $819,000 for the year ended December
      31, 2005, as compared to cost of services expense of $835,000 for the year
      ended
      December 31, 2004. The decrease in cost of services expense was primarily due
      to
      a reduction in service contracts in 2005 as compared to 2004. We
      do not
      expect our cost of services expenses to have a material impact on our financial
      results during the next fiscal year.





*Non-Cash
      Compensation Expense (Research and Development).*  Non-cash
      compensation expense related to stock option grants and warrant issuances was
      $594,000 for the year ended December 31, 2005, as compared to an expense of
      $413,000 for the year ended December 31, 2004. For the year ended December
      31,
      2005 and 2004, adjustment to fair market value of previously-issued options
      to
      consultants accounted for expenses of $464,000 and $276,000, respectively.
      Additionally, the issuance of options to consultants, requiring the use of
      the
      fair value method of accounting, resulted in expenses of $130,000 and $137,000,
      respectively.





31


*Non-Cash
      Acquired In-Process Research and Development Expense* . We
      did
      not record a charge for the year ended December 31, 2005. As required by
      Financial Accounting Standards Board, or FASB, Interpretation No. 4,
“Applicability of FASB Statement No. 2 to Business Combinations Accounted for
      by
      the Purchase Method," or FIN 4, the Company recorded a charge of $18,800,000
      for
      the year ended December 31, 2004, for the estimate of the portion of the
      purchase price of ACCESS Oncology allocated to acquired in-process research
      and
      development. A project-by-project valuation was performed with the assistance
      of
      independent valuation specialists to determine the fair value of research and
      development projects of ACCESS Oncology, which were in-process, but not yet
      completed.





*Other
      Research and Development Expenses* . Other
      research and development expenses increased by $14,377,000 to $24,182,000 for
      the year ended December 31, 2005, as compared to expenses of $9,805,000 for
      the
      year ended December 31, 2004. The increase in other research and development
      expenses was due primarily to a $10,011,000 increase in expenses related to
      our Sulonex clinical
      program, including costs associated with our
      pivotal Phase III and Phase IV clinical trials ,
      a
      $3,164,000 increase in expenses related to our KRX-0401 clinical program, and
      a
      $970,000 increase in expenses related to our other clinical stage compounds
      (the
      $970,000 increase includes $159,000 for the purchase of additional license
      rights and interests covering patent rights for KRX-0402). The comparative
      period last year included one-half, or $500,000, of a one-time bonus paid to
      our
      Chief Executive Officer pursuant to his employment agreement for the achievement
      of a corporate milestone.





We
      expect
      our other research and development costs to increase over the next year as
      a
      result of the pivotal Phase III and Phase IV clinical program for Sulonex and
      the expansion of the clinical program for KRX-0401, including the planned
      commencement of additional single agent and combination trials, as well as
      possible development programs for our other drug candidates.





*Non-Cash
      Compensation Expense (General and Administrative).*  Non-cash
      compensation expense related to stock option grants and warrant issuances was
      $775,000 for the year ended December 31, 2005, as compared to an expense of
      $1,087,000 for the year ended December 31, 2004. For the year ended December
      31,
      2005 and 2004, adjustment to fair market value of previously-issued options
      to
      consultants accounted for expenses of $306,000 and $175,000, respectively.
      Additionally, the issuance of options to consultants, requiring the use of
      fair
      value method of accounting, resulted in expenses of $24,000 and $245,000,
      respectively, and the continued vesting of options granted to certain directors
      below market value on the date of issuance (but equal to market price at grant
      date) accounted for expenses of $445,000 and $667,000,
      respectively.





*Other
      General and Administrative Expenses* . Other
      general and administrative expenses decreased by $165,000 to $3,416,000 for
      the
      year ended December 31, 2005, as compared to expenses of $3,581,000 for the
      year
      ended December 31, 2004. The decrease in general and administrative expenses
      in
      2005 was due primarily to the absence of payroll expenses incurred in 2004
      relating to one-half, or $500,000, of a one-time bonus to our Chief Executive
      Officer for the achievement of a corporate milestone pursuant to his employment
      agreement, partially offset by a $127,000 increase in insurance expenses and
      a
      $120,000 increase in facility expenses. The compensation of our Chief Executive
      Officer is allocated equally between other research and development expenses
      and
      other general and administrative expenses to reflect the allocation of his
      responsibilities and activities for Keryx.





We
      expect
      our other general and administrative costs to increase modestly over the next
      year primarily as a result of our clinical development programs, as well as
      increased costs associated with being a public company.





*Interest
      and Other Income, Net* . Interest
      and other income, net, increased by $1,547,000 to $2,317,000 for the year ended
      December 31, 2005, as compared to income of $770,000 for the year ended December
      31, 2004. The increase resulted from a higher level of invested funds due to
      the
      completion of a public offering of our common stock that closed in July 2005,
      as
      well as due to the general increase in short-term market interest rates when
      compared to the comparable period last year.





*Income
      Taxes* . We
      did
      not record any income tax expense for the year ended December 31, 2005. For
      the
      year ended December 31, 2004, income tax expense was $1,000. Our income tax
      expense for the year ended December 31, 2004 resulted from state taxes imposed
      on our capital.





**Years
      Ended December 31, 2004 and 2003**





*Revenue.* Service
      revenue for the year ended December 31, 2004, was $809,000 as compared to no
      revenue for the year ended December 31, 2003. Service revenue for the year
      ended
      December 31, 2004 was generated by OCOG, a subsidiary acquired through our
      acquisition of ACCESS Oncology in the first quarter of 2004.





*Cost
      of Services Expense* .
      Cost of
      services expense for the year ended December 31, 2004 was $835,000 as compared
      to no cost of services expense for the year ended December 31, 2003. Cost of
      services expense for the year ended December 31, 2004 was generated by OCOG,
      a
      subsidiary acquired through our acquisition of ACCESS Oncology in the first
      quarter of 2004.





32


*Non-Cash
      Compensation Expense (Research and Development).* Non-cash
      compensation expense related to stock option grants and warrant issuances was
      $413,000 for the year ended December 31, 2004, as compared to negative $486,000
      for the year ended December 31, 2003. This increase in non-cash compensation
      expense was primarily due to the issuance of options to consultants, which
      required use of the fair value method of accounting, as well as due to the
      adjustment to fair market value of previously-issued options to
      consultants.





*Non-Cash
      Acquired In-Process Research and Development Expense* .
      As
      required by FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to
      Business Combinations Accounted for by the Purchase Method," or FIN 4, the
      Company recorded a charge of $18,800,000 in the year ended December 31, 2004
      for
      the estimate of the portion of the purchase price of ACCESS Oncology allocated
      to acquired in-process research and development. A project-by-project valuation
      was performed with the assistance of independent valuation specialists to
      determine the fair value of research and development projects of ACCESS Oncology
      which were in-process, but not yet completed.





*Other
      Research and Development Expenses* .
      Other
      research and development expenses increased by $3,809,000 to $9,805,000 for
      the
      year ended December 31, 2004, as compared to expenses of $5,996,000 for the
      year
      ended December 31, 2003. The increase in other research and development expenses
      was due primarily to a $3,990,000 increase in expenses related to Sulonex,
      which
      includes one-half, or $500,000, of a one-time bonus paid to our Chief Executive
      Officer pursuant to his employment agreement for
      the
      achievement of a corporate milestone ,
      a
      $2,853,000 increase in expenses related to our other clinical stage compounds,
      and an increase in our licensing costs of $550,000 for the in-licensing of
      a
      pre-clinical compound. This increase was partially offset by the absence of
      a
      $2,358,000 non-cash impairment charge associated with our 2003 restructuring
      that was taken during the comparative period last year, as well as the absence
      of $964,000 in expenses related to early-stage research and development which
      ceased in 2003.





*Non-Cash
      Compensation Expense (General and Administrative).* Non-cash
      compensation expense related to stock option grants was $1,087,000 for the
      year
      ended December 31, 2004, as compared to expenses of $188,000 for the year ended
      December 31, 2003. This increase in non-cash compensation expense was primarily
      due to the issuance of previously granted options to purchase shares of our
      common stock to two non-employee directors at an exercise price less than market
      price at issue date (but equal to market price at grant date) and due to the
      issuance of options to consultants, which required use of the fair value method
      of accounting, as well as due to the adjustment to fair market value of
      previously-issued options to consultants.





*Other
      General and Administrative Expenses* .
      Other
      general and administrative expenses decreased by $103,000 to $3,581,000 for
      the
      year ended December 31, 2004, as compared to expenses of $3,684,000 for the
      year
      ended December 31, 2003. The decrease in general and administrative expenses
      was
      due primarily to the absence of a $124,000 non-cash impairment charge as well
      as
      the absence of $561,000 in accelerated depreciation of leasehold improvements
      associated with our 2003 restructuring that was taken during the comparative
      period last year. The decrease was partially offset by increased payroll
      expenses relating to one-half, or $500,000, of a one-time bonus to our Chief
      Executive Officer for the achievement of a corporate milestone pursuant to
      his
      employment agreement. The
      compensation of our Chief Executive Officer is allocated equally between other
      research and development expenses and other general and administrative expenses
      to reflect the allocation of his responsibilities and activities for
      Keryx.





*Interest
      and Other Income, Net* .
      Interest and other income, net, increased by $523,000 to $770,000 for the year
      ended December 31, 2004, as compared to income of $247,000 for the year ended
      December 31, 2003. The increase resulted from a higher level of invested funds
      due to the completion of two private placements of our common stock that closed
      in November 2003 and February 2004, respectively, as well as due to the general
      increase in short-term market interest rates when compared to the comparative
      period last year, partially offset by financing expenses related to notes
      payable assumed in the acquisition of ACCESS Oncology, which we repaid
      subsequent to closing the acquisition. In addition, the increase in interest
      and
      other income, net was due to a one-time payment of $107,000 from a related
      party
      service agreement that terminated in 2004.





*Income
      Taxes* .
      Income
      tax expense increased by $28,000 to $1,000 for the year ended December 31,
      2004,
      as compared to a credit of $27,000 for year ended December 31, 2003. Our income
      tax expense for the year ended December 31, 2004, results from state taxes
      imposed on our capital. Our income tax expense of negative $27,000 for the
      year
      ended December 31, 2003, was primarily due to the reversal of taxable income
      recorded in one of our Israeli subsidiaries partially offset by the elimination
      of net deferred tax assets of our Israeli subsidiaries, associated with the
      cessation of our activities in Israel. The reversal of taxable income and the
      write-off were non-recurring items.





33


**2003
      RESTRUCTURING**





In
      2003,
      we implemented and completed a strategic reorganization, which we sometimes
      refer to as the “2003 restructuring.” As a result of this reorganization, we
      ceased all early-stage research and development activities, ceased operations
      in
      our Jerusalem lab facility and completed the disposition of our fixed assets
      in
      Israel. The 2003 restructuring included a 17-person reduction in our workforce,
      primarily in Israel. As part of the 2003 restructuring, we reevaluated our
      long-lived assets in accordance with Statement of Financial Accounting
      Standards, or SFAS, No. 144 and recorded a non-cash impairment charge of
      $2,482,000 for the year ended December 31, 2003, of which $2,358,000 was
      included in research and development expenses and $124,000 was included in
      general and administrative expenses. The impairment charge included a write-off
      of $1,695,000 in fixed assets and $787,000 in intangible assets. In addition,
      with our decision to vacate the Jerusalem facility, we reevaluated and
      significantly shortened the useful life of the leasehold improvements associated
      with our administrative facilities, resulting in accelerated depreciation of
      $561,000 for the year ended December 31, 2003. In addition, upon vacating the
      facility in Jerusalem, the landlord of that facility claimed a bank guarantee
      in
      the amount of $222,000 that was previously provided as security in connection
      with the lease agreement. At December 31, 2004, there were no liabilities
      associated with the 2003 restructuring accrued for on our balance
      sheet.





The
      following table summarizes restructuring expenses that were incurred by us
      in
      2003 that were not part of our ongoing accrual for employee severance benefits
      made throughout the employment term in accordance with Israeli law.





(in thousands)
            
            **2003**Other
                research and development:Impairment
                charge
            
            $
            2,358Realization
                of bank guarantee in connection with lease agreement
            
            
            144Severance
                charge
            
            
            4Total
                other research and development
            
            
            2,506Other
                general and administrative:Impairment
                charge
            
            
            124Realization
                of bank guarantee in connection with lease agreement
            
            
            78Severance
                charge
            
            
            --Accelerated
                depreciation
            
            
            561Total
                other general and administrative
            
            
            763Total
            
            $
            3,269





**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      have
      financed our operations from inception primarily through public offerings of
      our
      common stock, various private placement transactions, and option and warrant
      exercises. This includes net proceeds of $75.8 million from our July 2005 public
      offering, and net proceeds of approximately $31.7 million from the private
      placement of our common stock in fiscal 2004.





As
      of
      December 31, 2005, we had $100.7 million in cash, cash equivalents, interest
      receivable, and short-term and long-term securities, an increase of $50.8
      million from December 31, 2004. Cash used in operating activities for the year
      ended December 31, 2005 was $25.8 million, as compared to $12.0 million for
      the
      year ended December 31, 2004. This increase in cash used in operating activities
      was due primarily to increased expenditures associated with the execution of
      our
      business plan, including costs associated with our pivotal Phase III and Phase
      IV clinical program for Sulonex, and expansion of the KRX-0401 clinical program.
      For the year ended December 31, 2005, net cash used in investing activities
      of
      $13.2 million was primarily the result of an investment in securities. For
      the
      year ended December 31, 2005, net cash provided by financing activities of
      $77.4
      million was primarily the result of a public offering of our common stock
      completed in July 2005, as well as net proceeds from the exercise of options
      and
      warrants.





In
      July
      2005, we completed a public offering of 5,780,000 shares of our common stock
      (including the exercise of a 750,000 over-allotment option granted to the
      underwriters) to investors at $14.05 per share. We received approximately $75.8
      million in proceeds, net of offering expenses of approximately $5.4
      million.





We
      believe that our $100.7 million in cash, cash equivalents, interest receivable
      and investment securities as of December 31, 2005 will be sufficient to enable
      us to meet our planned operating needs and capital expenditures for at least
      the
      next 24 months. Additionally, we also believe that our cash position provides
      us
      with added flexibility in our in-licensing and product acquisition program
      to
      potentially strengthen our portfolio with additional clinical-stage drug
      candidates.





34


Our
      cash
      and cash equivalents and investment securities as of December 31, 2005 are
      invested in highly liquid investments such as cash, money market accounts and
      short-term and long-term U.S. corporate and government debt and auction note
      securities. As of December 31, 2005, we are unaware of any known trends or
      any
      known demands, commitments, events, or uncertainties that will, or that are
      reasonably likely to, result in a material increase or decrease in our required
      liquidity. We expect that our liquidity needs throughout 2006 will continue
      to
      be funded from existing cash, cash equivalents, and short-term marketable
      securities.





On
      December 30, 2005, we filed a shelf registration statement on Form S-3 with
      the
      SEC, that was declared effective by the SEC on January 13, 2006. The
      registration statement provides for the offering of up to $150 million of our
      common stock. We may offer these securities from time to time in response to
      market conditions or other circumstances if we believe such a plan of financing
      is in the best interest of the company and our stockholders. We believe that
      the
      availability to conduct such offerings enhances our ability to raise additional
      capital to finance our operations.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      have
      not entered into any transactions with unconsolidated entities whereby we have
      financial guarantees, subordinated retained interests, derivative instruments
      or
      other contingent arrangements that expose us to material continuing risks,
      contingent liabilities, or any other obligations under a variable interest
      in an
      unconsolidated entity that provides us with financing, liquidity, market risk
      or
      credit risk support.





**OBLIGATIONS
      AND COMMITMENTS**





As
      of
      December 31, 2005, we have known contractual obligations, commitments and
      contingencies of $88,336,000. Of this amount, $85,457,000 relates to research
      and development agreements (primarily relating to our pivotal Phase III and
      Phase IV clinical program for Sulonex), of which $31,051,000 is due within
      the
      next year, with the remaining balance due as per the schedule below. The
      additional $2,879,000 relates to our operating lease obligations, of which
      $630,000 is due within the next year, with the remaining balance due as per
      the
      schedule below.





**Payment
                due by period****Contractual
                obligations**
            
            **Total**
            
            **Less
                than**
              **1
                year**
            
            **1-3**
              **years**
            
            **3-5**
              **years**
            
            **More
                than**
              **5
                years**Research
                and development agreements
            
            $
            85,457,000
            
            $
            31,051,000
            
            $
            40,751,000
            
            $
            13,655,000
            
            $
            --Operating
                leases
            
            
            2,879,000
            
            
            630,000
            
            
            1,193,000
            
            
            1,056,000
            
            
            --Total
            
            $
            88,336,000
            
            $
            31,681,000
            
            $
            41,944,000
            
            $
            14,711,000
            
            $
            --





The
      table
      above includes certain commitments that are contingent upon our continuing
      development of our drug candidates.





We
      have
      undertaken to make contingent milestone payments to certain of our licensors
      of
      up to approximately $57.1 million over the life of the licenses, of which
      approximately $44.2 million will be due upon or following regulatory approval
      of
      the licensed drugs. In certain cases, such payments will reduce any royalties
      due on sales of related products. In the event that the milestones are not
      achieved, we remain obligated to pay one licensor $50,000 annually until the
      license expires. We have also committed to pay to the former stockholders of
      ACCESS Oncology certain contingent equity rights if its drug candidates meet
      certain development milestones. In addition, pursuant to his employment
      agreement, our Chief Executive Officer is entitled to receive a one-time $2.0
      million performance-based cash bonus upon our achievement of certain levels
      of
      market capitalization or working capital. The commitments described in this
      paragraph are not reflected in the table above.





**CRITICAL
      ACCOUNTING POLICIES**





The
      discussion and analysis of our financial condition and results of operations
      is
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with U.S. generally accepted accounting principles. The preparation
      of these financial statements requires us to make estimates and judgments that
      affect the reported amount of assets and liabilities and related disclosure
      of
      contingent assets and liabilities at the date of our financial statements and
      the reported amounts of revenues and expenses during the applicable period.
      Actual results may differ from these estimates under different assumptions
      or
      conditions.





35


We
      define
      critical accounting policies as those that are reflective of significant
      judgments and uncertainties and which may potentially result in materially
      different results under different assumptions and conditions. In applying these
      critical accounting policies, our management uses its judgment to determine
      the
      appropriate assumptions to be used in making certain estimates. These estimates
      are subject to an inherent degree of uncertainty. Our critical accounting
      policies include the following:





*Stock
      Compensation* .
      We have
      granted options to employees, directors and consultants, as well as warrants
      to
      other third parties. In applying SFAS No. 123, “Accounting for Stock-Based
      Compensation,” or SFAS No. 123, we use the Black-Scholes pricing model to
      calculate the fair market value of our options and warrants. The Black-Scholes
      model takes into account volatility in the price of our stock, the risk-free
      interest rate, the estimated life of the option or warrant, the closing market
      price of our stock and the exercise price. We have assumed for the purposes
      of
      the Black-Scholes calculation that an option will be exercised one year after
      it
      fully vests for consultants and two years after it fully vests for employees,
      respectively. We base our estimates of our stock price volatility on the
      volatility during the period prior to the grant of the option or warrant;
      however, this estimate is neither predictive nor indicative of the future
      performance of our stock. For purposes of the calculation, we assumed that
      no
      dividends would be paid during the life of the options and warrants.





In
      accordance with EITF 96-18 “Accounting for Equity Instruments that are Issued to
      Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services,” total compensation expense for options issued to consultants is
      determined at the “measurement date.” The expense is recognized over the vesting
      period for the options. Until the measurement date is reached, the total amount
      of compensation expense remains uncertain. We record option compensation based
      on the fair value of the options at the reporting date. These options are then
      revalued, or the total compensation is recalculated based on the then current
      fair value, at each subsequent reporting date. This results in a change to
      the
      amount previously recorded in respect of the option grant, and additional
      expense or a negative expense may be recorded in subsequent periods based on
      changes in the assumptions used to calculate fair value, such as changes in
      market price, until the measurement date is reached and the compensation expense
      is finalized.





We
      account for stock-based employee and director compensation arrangements in
      accordance with the provisions of APB Opinion No. 25, “Accounting for Stock
      Issued to Employees,” or APB 25, and FASB Interpretation No. 44, “Accounting for
      Certain Transactions Involving Stock Compensation,” or FIN 44, as allowed by
      SFAS No. 123. We also comply with the disclosure provisions of SFAS No. 123
      and
      SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and
      Disclosure,” or SFAS No. 148.





*Accounting
      Related to the Valuation of Acquired In-Process Research and
      Development.* As
      required by FIN 4, we recorded a charge of $18,800,000 for the estimate of
      the
      portion of ACCESS Oncology purchase price allocated to acquired in-process
      research and development.





A
      project-by-project valuation using the guidance in SFAS No. 141, “Business
      Combinations” and the AICPA Practice Aid “Assets Acquired in a Business
      Combination to Be Used In Research and Development Activities: A Focus on
      Software, Electronic Devices and Pharmaceutical Industries” was performed with
      the assistance of independent valuation specialists to determine the fair value
      of research and development projects of ACCESS Oncology which were in-process,
      but not yet completed.





The
      fair
      value was determined using the income approach on a project-by-project basis.
      This method starts with a forecast of the expected future net cash flows. These
      cash flows are then adjusted to present value by applying an appropriate
      discount rate that reflects the project’s stage of completion and other
      risk factors. These other risk factors can include the nature of the product,
      the scientific data associated with the technology, the current patent situation
      and market competition.





The
      forecast of future cash flows required the following assumptions to be
      made:





·
            revenue
                that is likely to result from specific in-process research and development
                projects, including estimated patient populations, estimated selling
                prices, estimated market penetration and estimated market share and
                year-over-year growth rates over the product life
                cycles;





·
            cost
                of sales related to the potential products using industry data or
                other
                sources of market data;





·
            sales
                and marketing expense using industry data or other market
                data;





36


·
            general
                and administrative expenses; and





·
            research
                and development expenses.





The
      valuations are based on information that was available as of the acquisition
      date and the expectations and assumptions deemed reasonable by our management.
      No assurance can be given, however, that the underlying assumptions or events
      associated with such assets will occur as projected. For example, the following
      changes in our assumptions would have yielded the indicated change in the total
      amount of the acquired in-process research and development charge:





·
            if
                the growth rate regarding the revenue assumptions for the three drugs
                under development and included in the assumptions on future cash
                flows
                were increased by 10%, the result on the aggregate amount of the
                charge
                would have been approximately $4,500,000, yielding a total charge
                of
                approximately $23,300,000, or if the growth rate were decreased by
                5%, the
                result on the aggregate amount of the charge would have been approximately
                $2,200,000, yielding a total charge of approximately
                $16,600,000;





·
            if
                the discount rate used to bring the estimated future cash flows to
                a
                present value amount (which was based on a 55% rate) were reduced
                by 10%,
                the total charge would have increased to approximately $33,000,000,
                and if
                the discount rate were increased by 10%, the total charge would have
                decreased to approximately $11,000,000.





Additionally,
      if it was assumed that the research and development activity of the least
      developed of the three drugs under development acquired with ACCESS Oncology
      was
      going to be terminated for any reason and had no alternative future use,
      including inconclusive clinical results, the amount of the in-process research
      and development charge would have been reduced, possibly creating a situation
      where we would have recognized goodwill.





In
      each
      of the above scenarios, the change in the in-process research and development
      charge would have required an equal change in contingent equity rights, or
      if a
      significant decrease, goodwill would have been recorded.  Contingent equity
      rights represent the lesser of negative goodwill and the maximum value of the
      contingent consideration at the date of the acquisition.  Changes in the
      acquired in-process research and development charge do not change the amount
      or
      the value of the contingent consideration that could ultimately be paid.





*Accruals
      for Clinical Research Organization and Clinical Site Costs.* We
      make
      estimates of costs incurred to date in relation to external clinical research
      organizations, or CROs, and clinical site costs. We analyze the progress of
      clinical trials, including levels of patient enrollment, invoices received
      and
      contracted costs when evaluating the adequacy of the amount expensed and the
      related prepaid asset and accrued liability. Significant judgments and estimates
      must be made and used in determining the accrued balance in any accounting
      period. In addition, administrative costs related to external CROs are
      recognized on a straight-line basis over the estimated contractual
      period.





*Accounting
      For Income Taxes* .
      In
      preparing our consolidated financial statements, we are required to estimate
      our
      income taxes in each of the jurisdictions in which we operate. This process
      involves management estimation of our actual current tax exposure and assessment
      of temporary differences resulting from differing treatment of items for tax
      and
      accounting purposes. These differences result in deferred tax assets and
      liabilities. We must then assess the likelihood that our deferred tax assets
      will be recovered from future taxable income and, to the extent we believe
      that
      recovery is not likely, we must establish a valuation allowance. To the extent
      we establish a valuation allowance or increase this allowance in a period,
      we
      must include an expense within the tax provision in the statement of operations.
      Significant management judgment is required in determining our provision for
      income taxes, our deferred tax assets and liabilities and any valuation
      allowance recorded against our net deferred tax assets. We have fully offset
      our
      U.S. deferred tax assets with a valuation allowance. Our lack of earnings
      history and the uncertainty surrounding our ability to generate taxable income
      prior to the reversal or expiration of such deferred tax assets were the primary
      factors considered by management in establishing the valuation allowance. In
      prior periods, our wholly-owned Israeli subsidiaries had generated taxable
      income in respect of services provided within the group, and therefore we
      believed in the past that our deferred tax assets relating to the Israeli
      subsidiaries would be realized. With the cessation of operating activities
      in
      Israel during 2003 and the resulting absence of taxable income from the Israeli
      subsidiaries, the deferred tax asset was written off in 2003. Our current income
      tax expense results from state taxes imposed on our capital.





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**





In
      December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS No.
      123R”). SFAS No. 123R will replace SFAS No. 123, which was issued in 1995. SFAS
      No. 123R requires that the fair value of the grant of employee stock options
      be
      reported as an expense. Historically, we have disclosed the pro forma expense
      effect of stock options granted under our stock option plans in Note 1 -
      Organization and Summary of Significant Accounting Policies: Stock-Based
      Compensation. Under SFAS No. 123R, we would have been required to implement
      the
      new standard as of the beginning of the first interim or annual period that
      began after June 15, 2005. Calendar year-end companies, therefore, would have
      been permitted to follow the pre-existing accounting literature for the first
      and second quarters of 2005, but would be required to follow SFAS No. 123R
      for
      their third quarter reports.





37


On
      April
      15, 2005, the SEC approved a new rule permitting companies to implement SFAS
      No.
      123R at the beginning of their first annual period, rather than the first
      interim period, beginning after June 15, 2005. This means that the financial
      statements for a calendar year-end company do not need to comply with SFAS
      No.
      123R until the first quarter of 2006.





On
      October 18, 2005, the FASB issued FASB Staff Position (FSP) 123(R)-2, “Practical
      Accommodation to the Application of Grant Date as Defined in FASB Statement
      No.
      123(R)” (“FSP-123(R)-2”). FSP-123(R)-2 provides guidance about the mutual
      understanding by the employee and employer of the key terms and conditions
      of a
      share-based payment award that is one of the criteria for determining when
      an
      award has been granted under SFAS No. 123R. Under FSP-123(R)-2, assuming all
      other criteria are met, a mutual understanding of the key terms and conditions
      of an award is presumed to exist at the date the award is approved in accordance
      with the relevant corporate governance requirements if (a) the recipient does
      not have the ability to negotiate the key terms and conditions of the award
      with
      the employer and (b) the key terms of the award are expected to be communicated
      to all of the recipients within a relatively short period of time from the
      date
      of approval. The guidance in FSP 123R-2 should be applied on initial adoption
      of
      SFAS-123R.





We
      plan
      to adopt SFAS No. 123R and FSP-123(R)-2 in the first quarter of 2006. The
      estimated impact of adopting SFAS No. 123R and FSP-123(R)-2 will have a material
      impact on our consolidated financial statements.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
      RISK**





The
      primary objective of our investment activities is to preserve principal while
      maximizing our income from investments and minimizing our market risk. We invest
      in government and investment-grade corporate debt and auction note securities
      in
      accordance with our investment policy. Some of the securities in which we invest
      may have market risk. This means that a change in prevailing interest rates
      may
      cause the principal amount of the investment to fluctuate. For example, if
      we
      hold a security that was issued with a fixed interest rate at the
      then-prevailing rate and the prevailing interest rate later rises, the principal
      amount of our investment will probably decline. As of December 31, 2005, our
      portfolio of financial instruments consists of cash equivalents and short-term
      and long-term interest bearing securities, including corporate debt, money
      market funds, government debt and auction note securities. The average duration
      of all of our held-to-maturity investments held as of December 31, 2005, was
      less than 14 months. Additionally, the re-pricing of our auction notes within
      thirty days allows these securities to function as short-term investments.
      Due
      to the short-term nature of our investments, we believe we have no material
      exposure to interest rate risk arising from our investments.





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**





Our
      consolidated financial statements as of December 31, 2005, are incorporated
      by
      reference from Item 15 of this report and are presented beginning on page F-1.
      The following table sets forth unaudited selected operating results for each
      of
      the four fiscal quarters in the years ended December 31, 2005, and December
      31,
      2004. We believe that the following selected quarterly information includes
      all
      adjustments, consisting only of normal, recurring adjustments, which we consider
      necessary to present this information fairly. You should read this financial
      information in conjunction with our consolidated financial statements and
      related notes appearing elsewhere in this report. Our results of operations
      have
      fluctuated in the past and are likely to continue to fluctuate greatly from
      quarter to quarter in the future. Therefore, results of operations for any
      previous periods are not necessarily indicative of results of operations to
      be
      recorded in the future.





38





**2005****Mar.
                31**
            
            **June
                30**
            
            **Sept.
                30**
            
            **Dec.
                31**(in
                thousands, except per share data)**Service
                revenue**
            
            $
            157
            
            $
            126
            
            $
            82
            
            $
            209**Operating
                expenses:**Cost
                of services
            
            
            181
            
            
            161
            
            
            197
            
            
            280Research
                and development:Non-cash
                compensation
            
            
            176
            
            
            137
            
            
            226
            
            
            55Non-cash
                acquired in-process research
              and
                development
            
            
            --
            
            
            --
            
            
            --
            
            
            --Other
                research and development
            
            
            4,042
            
            
            5,180
            
            
            6,501
            
            
            8,459Total
                research and development
            
            
            4,218
            
            
            5,317
            
            
            6,727
            
            
            8,514General
                and administrative:Non-cash
                compensation
            
            
            185
            
            
            168
            
            
            258
            
            
            164Other
                general and administrative
            
            
            645
            
            
            699
            
            
            671
            
            
            1,401Total
                general and administrative
            
            
            830
            
            
            867
            
            
            929
            
            
            1,565**Total
                operating expenses**
            
            
            5,229
            
            
            6,345
            
            
            7,853
            
            
            10,359**Operating
                loss**
            
            
            (5,072
            )
            
            (6,219
            )
            
            (7,771
            )
            
            (10,150
            )**Other
                income (expense)**Interest
                and other income, net
            
            
            240
            
            
            267
            
            
            823
            
            
            987Income
                taxes
            
            
            --
            
            
            --
            
            
            --
            
            
            --**Net
                loss**
            
            $
            (4,832
            )
            $
            (5,952
            )
            $
            (6,948
            )
            $
            (9,163
            )**Net
                loss per common share**Basic
                and diluted
            
            $
            (0.15
            )
            $
            (0.19
            )
            $
            (0.19
            )
            $
            (0.24
            )





**2004****Mar.
                31**
            
            **June
                30**
            
            **Sept.
                30**
            
            **Dec.
                31**(in
                thousands, except per share data)**Service
                revenue**
            
            $
            95
            
            $
            150
            
            $
            397
            
            $
            167**Operating
                expenses:**Cost
                of services
            
            
            80
            
            
            123
            
            
            416
            
            
            216Research
                and development:Non-cash
                compensation
            
            
            202
            
            
            23
            
            
            70
            
            
            118Non-cash
                acquired in-process research
              and
                development
            
            
            18,800
            
            
            --
            
            
            --
            
            
            --Other
                research and development
            
            
            1,652
            
            
            2,067
            
            
            2,594
            
            
            3,492Total
                research and development
            
            
            20,654
            
            
            2,090
            
            
            2,664
            
            
            3,610General
                and administrative:Non-cash
                compensation
            
            
            185
            
            
            621
            
            
            161
            
            
            120Other
                general and administrative
            
            
            1,093
            
            
            745
            
            
            596
            
            
            1,147Total
                general and administrative
            
            
            1,278
            
            
            1,366
            
            
            757
            
            
            1,267**Total
                operating expenses**
            
            
            22,012
            
            
            3,579
            
            
            3,837
            
            
            5,093**Operating
                loss**
            
            
            (21,917
            )
            
            (3,429
            )
            
            (3,440
            )
            
            (4,926
            )**Other
                income (expense)**Interest
                and other income, net
            
            
            95
            
            
            170
            
            
            187
            
            
            318Income
                taxes
            
            
            (1
            )
            
            --
            
            
            --
            
            
            --**Net
                loss**
            
            $
            (21,823
            )
            $
            (3,259
            )
            $
            (3,253
            )
            $
            (4,608
            )**Net
                loss per common share**Basic
                and diluted
            
            $
            (0.78
            )
            $
            (0.11
            )
            $
            (0.11
            )
            $
            (0.15
            )




39


**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND****FINANCIAL
      DISCLOSURE.**





Not
      applicable.





**ITEM
      9A. CONTROLS AND PROCEDURES.**





*Evaluation
      of Disclosure Controls and Procedures.* Based
      on
      their evaluation as of December 31, 2005, our Chief Executive Officer and
      Principal Financial Officer (which at that time was Ron Bentsur, who as of
      the
      date of this report is now the principal accounting officer and has executed
      this report in that capacity), have concluded that our disclosure controls
      and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act ) were
      effective to ensure that the information required to be disclosed by us in
      our
      reports that we file or submit to the SEC was recorded, processed, summarized
      and reported properly, within the time periods specified in the SEC’s rules and
      forms.





*Management's
      Report on Internal Control over Financial Reporting.* Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting (as defined in Rule 13a-15(f) under the
      Exchange Act). Our management assessed the effectiveness of our internal control
      over financial reporting as of December 31, 2005. In making this
      assessment, our management used the criteria set forth by the Committee of
      Sponsoring Organizations of the Treadway Commission, known as COSO, in Internal
      Control-Integrated Framework. Our management has concluded that, as of
      December 31, 2005, our internal control over financial reporting is
      effective based on these criteria. Our independent registered public accounting
      firm, KPMG LLP, issued an attestation on our assessment of our internal control
      over financial reporting, which is included herein.





*Changes
      in Internal Control Over Financial Reporting.* There
      were no changes in our internal controls over financial reporting during the
      quarter ended December 31, 2005, that have materially affected, or are
      reasonably likely to materially affect our internal controls over financial
      reporting.





*Limitations
      on the Effectiveness of Controls.* Our
      management, including our Chief Executive Officer, Principal Financial Officer
      and Principal Accounting Officer, does not expect that our disclosure controls
      and procedures or our internal control over financial reporting will prevent
      all
      errors and all fraud. A control system, no matter how well conceived and
      operated, can provide only reasonable, not absolute, assurance that the
      objectives of the control system are met. Further, the design of a control
      system must reflect the fact that there are resource constraints, and the
      benefits of controls must be considered relative to their costs. Because of
      the
      inherent limitations in all control systems, no evaluation of controls can
      provide absolute assurance that all control issues and instances of fraud,
      if
      any, within our company have been detected.





**ITEM
      9B. OTHER INFORMATION**





Not
      Applicable.





**Part
      III**





**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY**





The
      information required by this Item regarding our directors and officers is
      incorporated herein by reference from our Proxy Statement for our 2006 Annual
      Meeting of Stockholders.





**ITEM
      11. EXECUTIVE COMPENSATION**





The
      information required by this Item regarding executive compensation is
      incorporated herein by reference from our Proxy Statement for our 2006 Annual
      Meeting of Stockholders.





**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





The
      information required by this Item regarding the security ownership of certain
      of
      our beneficial owners and our management is incorporated herein by reference
      from our Proxy Statement for our 2006 Annual Meeting of
      Stockholders.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**





The
      information required by this Item regarding certain relationships and related
      transactions is incorporated herein by reference from our Proxy Statement for
      our 2006 Annual Meeting of Stockholders.




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**





The
      information required by this Item regarding principal accountant fees and
      services is incorporated herein by reference to our Proxy Statement for our
      2006
      Annual Meeting of Stockholders.





40


**PART
      IV**





**ITEM
      15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES**





**(a)**  **1.**  **Consolidated
      Financial Statements**





The
      following consolidated financial statements of Keryx Biopharmaceuticals, Inc.
      are filed as part of this report.





**Contents**
            
            **Page**Reports
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheets as of December 31, 2005 and 2004
            
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2005, 2004
                and
                2003, and the period from December 3, 1996 to December 31,
                2005
            
            F-4Consolidated
                Statements of Changes in Stockholders’ Equity for the years ended December
                31, 2005, 2004, and 2003, and the period from December 3, 1996 to
                December
                31, 2005
            
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2005, 2004
                and
                2003, and the period from December 3, 1996 to December 31,
                2005
            
            F-10Notes
                to the Consolidated Financial Statements
            
            F-12





**2.**  **Consolidated
      Financial Statement Schedules**





All
      schedules are omitted as the information required is inapplicable or the
      information is presented in the consolidated financial statements or the related
      notes.





**3.**  **Exhibits**





**Exhibit****Number**
            **Exhibit
                Description**2.1
            Agreement
                and Plan of Merger by and among Keryx Biopharmaceuticals, Inc., AXO
                Acquisition Corp., and ACCESS Oncology, Inc. dated as of January
                7, 2004,
                filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated
                January 8, 2004 (File No. 000-30929), and incorporated herein by
                reference.2.2
            First
                Amendment to the Agreement and Plan of Merger by and among Keryx
                Biopharmaceuticals, Inc., AXO Acquisition Corp., and ACCESS Oncology,
                Inc.
                dated as of February 5, 2004, filed as Exhibit 2.2 to the Registrant’s
                Current Report on Form 8-K dated February 5, 2004 (File No. 000-30929),
                and incorporated herein by reference.3.1
            Amended
                and Restated Certificate of Incorporation of Keryx Biopharmaceuticals,
                Inc., filed as Exhibit 3.1 to the Registrant's Annual Report on Form
                10-Q
                for the quarter ended June 30, 2004, filed on August 12, 2004 (File
                No.
                000-30929), and incorporated herein by reference.3.2
            Amended
                and Restated Bylaws of Keryx Biopharmaceuticals, Inc., filed as Exhibit
                3.2 to the Registrant’s Annual Report on Form 10-K for the year ended
                December 31, 2001, filed on March 26, 2002 (File No. 000-30929),
                and
                incorporated herein by reference.4.1
            Specimen
                Common Stock Certificate, filed as Exhibit 4.1 to the Registrant’s First
                Amendment to the Registration Statement on Form S-1 filed on June
                30, 2000
                (File No. 333-37402), and incorporated herein by
                reference.4.2
            Form
                of Warrant for the Purchase of Shares of Common Stock between certain
                holders of Series A Preferred Stock and Keryx Biopharmaceuticals,
                Inc.,
                dated as of December 14, 1999, filed as Exhibit 4.9 to the Registrant’s
                Registration Statement on Form S-1 filed on May 19, 2000 (File No.
                333-37402), and incorporated herein by reference.




41


4.3
            Form
                of Common Stock Purchase Warrant dated November 20, 2003, issued
                to the
                purchasers under the Securities Purchase Agreement, filed as Exhibit
                10.3
                to the Registrant’s Registration Statement on Form S-3 filed on December
                12, 2003 (File No. 333-111143), and incorporated herein by
                reference.4.4
            Securities
                Purchase Agreement dated November 12, 2003 among Keryx Biopharmaceuticals,
                Inc. and the Purchasers identified on the signature pages thereof,
                filed
                as Exhibit 10.1 to the Company’s Registration Statement on Form S-3 filed
                on December 12, 2003 (File No. 333-111143), and incorporated herein
                by
                reference.4.5
            Registration
                Rights Agreement dated November 17, 2003 among Keryx Biopharmaceuticals,
                Inc. and the Purchasers identified on the signature pages thereof,
                filed
                as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-3
                filed on December 12, 2003 (File No. 333-111143), and incorporated
                herein
                by reference.4.6
            Securities
                Purchase Agreement dated February 12, 2004 among Keryx Biopharmaceuticals,
                Inc. and the Purchasers identified on the signature pages thereof,
                filed
                as Exhibit 10.1 to the Company’s Registration Statement on Form S-3 filed
                on March 16, 2004 (File No. 333-113654), and incorporated herein
                by
                reference4.7
            Registration
                Rights Agreement dated February 17, 2004 among Keryx Biopharmaceuticals,
                Inc. and the Purchasers identified on the signature pages thereof,
                filed
                as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-3
                filed on March 16, 2004 (File No. 333-113654), and incorporated herein
                by
                reference.10.1†
            Employment
                Agreement with I. Craig Henderson, M.D., dated as of January 31,
                2004.
                filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form
                10-Q
                for the quarter ended June 30, 2004, filed on August 12, 2004 (File
                No.
                000-30929), and incorporated herein by reference.10.2!
            License
                Agreement between Alfa Wassermann S.p.A. and Partec Ltd., dated as
                of
                November 12, 1998, filed as Exhibit 10.7 to the Registrant’s Second
                Amendment to the Registration Statement on Form S-1 filed on July
                24, 2000
                (File No. 333-37402), and incorporated by reference.10.3!
            License
                Agreement between Opocrin S.p.A. and Keryx Biopharmaceuticals, Inc.,
                dated
                September 25, 2002, filed as Exhibit 10.9 to the Registrant’s Quarterly
                Report on Form 10-Q for the quarter ended September 30, 2002 filed
                on
                November 12, 2002 (File No. 000-30929), and incorporated herein by
                reference.10.4
            Form
                of SulonexTM (KRX-101) Scientific Advisory Board Agreement, filed as
                Exhibit 10.20 to the Registrant’s First Amendment to the Registration
                Statement on Form S-1 filed on June 30, 2000 (File No. 333-37402),
                and
                incorporated herein be reference.10.5†
            Employment
                Agreement between Ron Bentsur and Keryx Biopharmaceuticals, Inc.,
                dated as
                of June 23, 2003, filed as Exhibit 10.1 to the Company’s Quarterly Report
                on Form 10-Q for the quarter ended June 30, 2003 filed on August
                14, 2003
                (File No. 000-30929), and incorporated herein by reference.10.6†
            Employment
                Agreement between Keryx Biopharmaceuticals, Inc. and Michael S. Weiss
                dated as of December 23, 2002, filed as Exhibit 10.1 to the Registrant’s
                Quarterly Report of Form 10-Q for the quarter ended March 31, 2003
                filed
                on May 15, 2003 (File No. 000-30929), and incorporated herein by
                reference.10.7†
            1999
                Stock Option Plan, as amended, filed as Exhibit 10.2 to the Registrant’s
                Quarterly Report of Form 10-Q for the quarter ended March 31, 2003
                filed
                on May 15, 2003 (File No. 000-30929) and incorporated herein by
                reference.10.8†
            2000
                Stock Option Plan, as amended, filed as Exhibit 10.3 to the Registrant’s
                Quarterly Report of Form 10-Q for the quarter ended March 31, 2003
                filed
                on May 15, 2003 (File No. 000-30929) and incorporated herein by
                reference.10.9†
            2002
                CEO Incentive Stock Option Plan, filed as Exhibit 10.4 to the Registrant’s
                Quarterly Report of Form 10-Q for the quarter ended March 31, 2003
                filed
                on May 15, 2003 (File No. 000-30929) and incorporated herein by
                reference.




42


10.10
            Sub-license
                Agreement dated October 13, 2000 between Procept, Inc. and AOI
                Pharmaceuticals, Inc.,
                filed as Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for
                the year ended December 31, 2003, filed on March 30, 2004, and
                incorporated herein by reference.10.11
            Amendment
                to Sub-license agreement dated February 28, 2002 between AOI
                Pharmaceuticals, Inc. and Procept, Inc.,
                filed as Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K for
                the year ended December 31, 2003, filed on March 30, 2004, and
                incorporated herein by reference.10.12
            Patent
                License Agreement dated February 28, 2002 between Procept, Inc. and
                United
                State Public Health Services, as amended,
                filed as Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for
                the year ended December 31, 2003, filed on March 30, 2004, and
                incorporated herein by reference.10.13
            Release
                Agreement dated February 28, 2002 among AOI Pharmaceuticals, Inc.,
                Procept, Inc., and United States Public Health Services,
                filed as Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for
                the year ended December 31, 2003, filed on March 30, 2004, and
                incorporated herein by reference.10.14
            Comprehensive
                Release Agreement dated May 29, 2002 among AOI Pharmaceuticals, Inc.,
                Procept, Inc., United States Public Health Services and the University
                of
                Chicago,
                filed as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for
                the year ended December 31, 2003, filed on March 30, 2004, and
                incorporated herein by reference.10.15!
            Sub-license
                Agreement between Prescient NeuroPharma, Inc. and ACCESS Oncology,
                Inc.
                dated December 24,2001,
                filed as Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K for
                the year ended December 31, 2003, filed on March 30, 2004, and
                incorporated herein by reference. .10.16!
            License
                Agreement dated September 18, 2002 between Zentaris AG and AOI Pharma,
                Inc,
                filed as Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for
                the year ended December 31, 2003, filed on March 30, 2004, and
                incorporated herein by reference.10.17!
            Addendum
                Agreement to License and Cooperation Agreement for Perifosine dated
                December 3, 2003 between Zentaris AG and AOI Pharma, Inc.,
                filed as Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K for
                the year ended December 31, 2003, filed on March 30, 2004, and
                incorporated herein by reference.10.18
            Cooperative
                Research and Development Agreement between the National Cancer Institute
                and ASTA Medica Inc., as amended,
                filed as Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K for
                the year ended December 31, 2003, filed on March 30, 2004, and
                incorporated herein by reference.10.19
            Keryx
                Biopharmaceuticals, Inc. 2004 Long-Term Incentive Plan, filed with
                the
                Registrant’s Definitive Proxy Statement for the Annual Meeting of
                Stockholders on June 10, 2004, filed on April 29, 2004, and incorporated
                herein by reference.10.20†
            Employment
                Agreement between Ronald C. Renaud, Jr. and Keryx Biopharmaceuticals,
                Inc., dated as of February 14, 2006.10.21*
            License
                Agreement between Keryx Biopharmaceuticals, Inc. and Panion & BF
                Biotech, Inc. dated as of November 7, 2005.21.1
            List
                of subsidiaries of Keryx Biopharmaceuticals, Inc.23.1
            Consent
                of KPMG LLP.24.1
            Power
                of Attorney of Director and Officers of Keryx Biopharmaceuticals,
                Inc.
                (included herein).31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
                dated
                March 7, 2006.




43


31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
                dated
                March 7, 2006.32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
                March 7,
                2006.32.2
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
                March 7,
                2006.


!
            Confidential
                treatment has been granted with respect to the omitted portions of
                this
                exhibit.


†
            Indicates
                management contract or compensatory plan or
                arrangement.


*
            Confidential
                treatment has been requested with respect to the omitted portions
                of this
                exhibit.





44


**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Financial Statements as of December 31, 2005**








Contents
            
            PageReports
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheets as of December 31, 2005 and 2004
            
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2005, 2004
                and
                2003, and the period from December 3, 1996 to December 31,
                2005
            
            F-4Consolidated
                Statements of Changes in Stockholders’ Equity for the years ended December
                31, 2005, 2004, and 2003, and the period from December 3, 1996 to
                December
                31, 2005
            
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2005, 2004
                and
                2003, and the period from December 3, 1996 to December 31,
                2005
            
            F-10Notes
                to the Consolidated Financial Statements
            
            F-12








**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Financial Statements as of December 31, 2004**








**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Stockholders of


Keryx
      Biopharmaceuticals, Inc.:





We
      have
      audited the accompanying consolidated balance sheets of Keryx
      Biopharmaceuticals, Inc. and subsidiaries (the “Company”), a development stage
      company, as of December 31, 2005 and 2004, and the related consolidated
      statements of operations, stockholders’ equity, and cash flows for each of the
      years in the three-year period ended December 31, 2005, and for the period
      from
      December 3, 1996 to December 31, 2005. These consolidated financial statements
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these consolidated financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Keryx Biopharmaceuticals,
      Inc. and subsidiaries, a development stage company, as of December 31, 2005
      and
      2004, and the results of their operations and their cash flows for each of
      the
      years in the three-year period ended December 31, 2005, and for the period
      from
      December 3, 1996 to December 31, 2005, in conformity with U.S. generally
      accepted accounting principles.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of the Company’s internal
      control over financial reporting as of December 31, 2005, based on criteria
      established in Internal Control-Integrated Framework issued by the Committee
      of
      Sponsoring Organizations of the Treadway Commission (COSO), and our report
      dated
      March 7, 2006 expressed an unqualified opinion on management’s assessment of,
      and the effective operation of, internal control over financial
      reporting.





/s/  KPMG
      LLP




New
      York,
      New York


March
      7,
      2006





F-1




**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Stockholders of


Keryx
      Biopharmaceuticals, Inc.:





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting, that Keryx
      Biopharmaceuticals, Inc. and subsidiaries (the “Company”), a development stage
      company, maintained effective internal control over financial reporting as
      of
      December 31, 2005, based on criteria established in Internal
      Control-Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission (COSO). The Company’s management is responsible for
      maintaining effective internal control over financial reporting and for its
      assessment of the effectiveness of internal control over financial reporting.
      Our responsibility is to express an opinion on management’s assessment and an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with U.S. generally accepted accounting principles. A company’s internal control
      over financial reporting includes those policies and procedures that (i) pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company;
      (ii) provide reasonable assurance that transactions are recorded as
      necessary to permit preparation of financial statements in accordance with
      U.S.
      generally accepted accounting principles, and that receipts and expenditures
      of
      the company are being made only in accordance with authorizations of management
      and directors of the company; and (iii) provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use,
      or
      disposition of the company’s assets that could have a material effect on the
      financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that the Company maintained effective internal
      control over financial reporting as of December 31, 2005, is fairly stated,
      in all material respects, based on, criteria established in Internal
      Control-Integrated Framework issued by the COSO. Also, in our opinion, the
      Company maintained, in all material respects, effective internal control over
      financial reporting as of December 31, 2005, based on criteria established
      in Internal Control-Integrated Framework issued by COSO.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Keryx
      Biopharmaceuticals, Inc. and subsidiaries as of December 31, 2005 and 2004,
      and
      the related consolidated statements of operations, stockholders’ equity, and
      cash flows for each of the years in the three-year period ended December 31,
      2005, and for the period from December 3, 1996 to December 31, 2005, and our
      report dated March 7, 2006 expressed an unqualified opinion on those
      consolidated financial statements.





/s/  KPMG
      LLP





New
      York,
      New York


March
      7,
      2006


F-2





**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Balance Sheets as of December 31**





(in
      thousands, except share and per share amounts)





**2005**
            
            **2004****Assets**Current
                assetsCash
                and cash equivalents
            
            $
            68,175
            
            $
            29,699Short-term
                investment securities
            
            
            18,272
            
            
            20,035Accrued
                interest receivable
            
            
            336
            
            
            144Other
                receivables and prepaid expenses
            
            
            3,200
            
            
            622Total
                current assets
            
            
            89,983
            
            
            50,500Long-term
                investment securities
            
            
            13,950
            
            
            --Property,
                plant and equipment, net
            
            
            1,004
            
            
            145Other
                assets (primarily intangible assets), net
            
            
            160
            
            
            217Total
                assets
            
            $
            105,097
            
            $
            50,862**Liabilities
                and stockholders’ equity**Current
                liabilitiesAccounts
                payable and accrued expenses
            
            $
            5,054
            
            $
            3,079Accrued
                compensation and related liabilities
            
            
            936
            
            
            743Deferred
                revenue
            
            
            103
            
            
            140Total
                current liabilities
            
            
            6,093
            
            
            3,962Contingent
                equity rights
            
            
            4,004
            
            
            4,004Other
                liabilities
            
            
            322
            
            
            92Total
                liabilities
            
            
            10,419
            
            
            8,058Stockholders’
                equityCommon
                stock, $0.001 par value per share (60,000,000 and 60,000,000 shares
                authorized, 37,831,896 and 31,373,280 shares issued, 37,775,796 and
                31,317,180 shares outstanding at December 31, 2005, and 2004,
                respectively)
            
            
            38
            
            
            31Additional
                paid-in capital
            
            
            210,758
            
            
            132,643Treasury
                stock, at cost, 56,100 shares at December 31, 2005, and 2004,
                respectively
            
            
            (89
            )
            
            (89
            )Unearned
                compensation
            
            
            (1,581
            )
            
            (2,228
            )Deficit
                accumulated during the development stage
            
            
            (114,448
            )
            
            (87,553
            )Total
                stockholders’ equity
            
            
            94,678
            
            
            42,804Total
                liabilities and stockholders’ equity
            
            $
            105,097
            
            $
            50,862





The
      accompanying notes are an integral part of the consolidated financial
      statements.





F-3


**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Statements of Operations for the Year Ended December 31**


(in
      thousands, except share and per share amounts)





**2005**
            
            **2004**
            
            **2003**
            
            **Amounts
                accumulated during the********development****stage**Revenue:Service
                revenue
            
            $
            574
            
            $
            809
            
            $
            --
            
            $
            1,383Management
                fees from related party
            
            
            --
            
            
            --
            
            
            --
            
            
            300Total
                revenue
            
            
            574
            
            
            809
            
            
            --
            
            
            1,683Operating
                expenses:Cost
                of services
            
            
            819
            
            
            835
            
            
            --
            
            
            1,654Research
                and development:Non-cash
                compensation
            
            
            594
            
            
            413
            
            
            (486
            )
            
            7,734Non-cash
                acquired in-process research and development
            
            
            --
            
            
            18,800
            
            
            --
            
            
            18,800Other
                research and development
            
            
            24,182
            
            
            9,805
            
            
            5,996
            
            
            63,894Total
                research and development expenses
            
            
            24,776
            
            
            29,018
            
            
            5,510
            
            
            90,428General
                and administrative:Non-cash
                compensation
            
            
            775
            
            
            1,087
            
            
            188
            
            
            5,441Other
                general and administrative
            
            
            3,416
            
            
            3,581
            
            
            3,684
            
            
            25,086Total
                general and administrative expenses
            
            
            4,191
            
            
            4,668
            
            
            3,872
            
            
            30,527Total
                operating expenses
            
            
            29,786
            
            
            34,521
            
            
            9,382
            
            
            122,609Operating
                loss
            
            
            (29,212
            )
            
            (33,712
            )
            
            (9,382
            )
            
            (120,926
            )Interest
                and other income, net
            
            
            2,317
            
            
            770
            
            
            247
            
            
            6,969Net
                loss before income taxes
            
            
            (26,895
            )
            
            (32,942
            )
            
            (9,135
            )
            
            (113,957
            )Income
                taxes
            
            
            --
            
            
            1
            
            
            (27
            )
            
            491Net
                loss
            
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (9,108
            )
            $
            (114,448
            )Basic
                and diluted loss per common share
            
            $
            (0.78
            )
            $
            (1.10
            )
            $
            (0.43
            )
            $
            (6.34
            )Weighted
                average shares used in computing basic and diluted net loss per common
                share
            
            
            34,384,576
            
            
            30,053,647
            
            
            21,367,088
            
            
            18,055,463





The
      accompanying notes are an integral part of the consolidated financial
      statements.





F-4





**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Statements of Changes in Stockholders’ Equity**





(in
      thousands, except share amounts)





**Series
                A convertible**
              **preferred
                stock**
            
            **Common
                stock**
            
            **Additional
                paid-in****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **capital**Balance
                at December 31, 2002
            
            
            --
            
            $
            --
            
            
            19,913,185
            
            $
            20
            
            $
            72,067Changes
                during the year:Issuance
                of common stock in private placement (net of issuance expenses of
                $867)
            
            
            --
            
            
            --
            
            
            3,529,412
            
            
            3
            
            
            14,130Purchase
                of common stock
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Exercise
                of options
            
            
            --
            
            
            --
            
            
            1,574,276
            
            
            2
            
            
            179Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (334
            )Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Balance
                at December 31, 2003
            
            
            --
            
            $
            --
            
            
            25,016,873
            
            $
            25
            
            $
            86,042





**Treasury
                stock**
            
            **Unearned**
            
            **Deficit
                accumulated during the development****Shares**
            
            **Amount**
            
            **compensation**
            
            **stage**
            
            **Total**Balance
                at December 31, 2002
            
            
            46,300
            
            $
            (77
            )
            $
            (178
            )
            $
            (45,502
            )
            $
            26,330Changes
                during the year:Issuance
                of common stock in private placement (net of issuance expenses of
                $867)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            14,133Purchase
                of common stock
            
            
            9,800
            
            
            (12
            )
            
            --
            
            
            --
            
            
            (12
            )Exercise
                of options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            181Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            --
            
            
            --
            
            
            36
            
            
            --
            
            
            (298
            )Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (9,108
            )
            
            (9,108
            )Balance
                at December 31, 2003
            
            
            56,100
            
            $
            (89
            )
            $
            (142
            )
            $
            (54,610
            )
            $
            31,226





The
      accompanying notes are an integral part of the consolidated financial
      statements.





F-5


**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Statements of Changes in Stockholders’ Equity (continued)**





(in
      thousands, except share amounts)





**Series
                A convertible**
              **preferred
                stock**
            
            **Common
                stock**
            
            **Additional
                paid-in****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **capital**Balance
                at December 31, 2003
            
            
            --
            
            $
            --
            
            
            25,016,873
            
            $
            25
            
            $
            86,042Changes
                during the year:Issuance
                of common stock in private placement (net of issuance expenses of
                $338)
            
            
            --
            
            
            --
            
            
            3,200,000
            
            
            3
            
            
            31,659Issuance
                of common stock in connection with acquisition
            
            
            --
            
            
            --
            
            
            623,145
            
            
            1
            
            
            6,324Exercise
                of warrants
            
            
            --
            
            
            --
            
            
            348,824
            
            
            --*
            
            
            2,093Exercise
                of options
            
            
            --
            
            
            --
            
            
            2,184,438
            
            
            2
            
            
            2,939Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            3,586Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Balance
                at December 31, 2004
            
            
            --
            
            $
            --
            
            
            31,373,280
            
            $
            31
            
            $
            132,643





**Treasury
                stock**
            
            **Unearned**
            
            **Deficit
                accumulated during the development****Shares**
            
            **Amount**
            
            **compensation**
            
            **stage**
            
            **Total**Balance
                at December 31, 2003
            
            
            56,100
            
            $
            (89
            )
            $
            (142
            )
            $
            (54,610
            )
            $
            31,226Changes
                during the year:Issuance
                of common stock in private placement (net of issuance expenses of
                $338)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            31,662Issuance
                of common stock in connection with acquisition
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            6,325Exercise
                of warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            2,093Exercise
                of options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            2,941Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            --
            
            
            --
            
            
            (2,086
            )
            
            --
            
            
            1,500Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (32,943
            )
            
            (32,943
            )Balance
                at December 31, 2004
            
            
            56,100
            
            $
            (89
            )
            $
            (2,228
            )
            $
            (87,553
            )
            $
            42,804





*
      Amount
      less than one thousand dollars.





The
      accompanying notes are an integral part of the consolidated financial
      statements.





F-6


**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Statements of Changes in Stockholders’ Equity (continued)**





(in
      thousands, except share amounts)





**Series
                A convertible**
              **preferred
                stock**
            
            **Common
                stock**
            
            **Additional
                paid-in****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **capital**Balance
                at December 31, 2004
            
            
            --
            
            $
            --
            
            
            31,373,280
            
            $
            31
            
            $
            132,643Changes
                during the year:Issuance
                of common stock in public offering (net of issuance expenses of
                $5,419)
            
            
            --
            
            
            --
            
            
            5,780,000
            
            
            6
            
            
            75,784Exercise
                of warrants
            
            
            --
            
            
            --
            
            
            157,647
            
            
            1
            
            
            946Exercise
                of options
            
            
            --
            
            
            --
            
            
            520,969
            
            
            --*
            
            
            663Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            722Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Balance
                at December 31, 2005
            
            
            --
            
            $
            --
            
            
            37,831,896
            
            $
            38
            
            $
            210,758





**Treasury
                stock**
            
            **Unearned**
            
            **Deficit
                accumulated during the development****Shares**
            
            **Amount**
            
            **compensation**
            
            **stage**
            
            **Total**Balance
                at December 31, 2004
            
            
            56,100
            
            $
            (89
            )
            $
            (2,228
            )
            $
            (87,553
            )
            $
            42,804Changes
                during the year:Issuance
                of common stock in public offering (net of issuance expenses of
                $5,419)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            75,790Exercise
                of warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            947Exercise
                of options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            663Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            --
            
            
            --
            
            
            647
            
            
            --
            
            
            1,369Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (26,895
            )
            
            (26,895
            )Balance
                at December 31, 2005
            
            
            56,100
            
            $
            (89
            )
            $
            (1,581
            )
            $
            (114,448
            )
            $
            94,678





*
      Amount
      less than one thousand dollars.





The
      accompanying notes are an integral part of the consolidated financial
      statements.





F-7


**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Statements of Changes in Stockholders’ Equity (continued)**





(in
      thousands, except share amounts)





**Series
                A convertible**
              **preferred
                stock**
            
            **Common
                stock**
            
            **Additional
                paid-in****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **capital****Amounts
                accumulated during the development stage (December 3, 1996 to December
                31,
                2005):**Contributed
                capital
            
            
            --
            
            $
            --
            
            
            --
            
            $
            --
            
            $
            3,181Conversion
                of convertible notes of Partec into stock in Keryx
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            2,973Issuance
                of Series A convertible preferred stock to investors at $100 per
                share for
                cash (net of issuance expenses of $552)
            
            
            89,180
            
            
            --*
            
            
            --
            
            
            --
            
            
            8,338Issuance
                of Series A convertible preferred stock at $0.001 par value to note
                holders in exchange for note of predecessor
            
            
            29,465
            
            
            --*
            
            
            --
            
            
            --
            
            
            --Issuance
                of common stock to technology licensors for technology
                license
            
            
            --
            
            
            --
            
            
            1,256,797
            
            
            2
            
            
            358Issuance
                of common stock in public offering (net of issuance expenses of
                $5,419)
            
            
            --
            
            
            --
            
            
            5,780,000
            
            
            6
            
            
            75,784Issuance
                of common stock in private placement (net of issuance expenses of
                $1,205)
            
            
            --
            
            
            --
            
            
            6,729,412
            
            
            6
            
            
            45,789Issuance
                of common stock in connection with acquisition
            
            
            --
            
            
            --
            
            
            623,145
            
            
            1
            
            
            6,324Receipt
                on account of shares issued in prior years
            
            
            --
            
            
            --
            
            
            6,900,000
            
            
            7
            
            
            --Conversion
                of Series A convertible preferred stock to common stock
            
            
            (118,645
            )
            
            (--)*
            
            
            6,114,962
            
            
            6
            
            
            (6
            )Issuance
                of common stock in initial public offering, including exercise of
                overallotment (net of issuance expenses of $5,702)
            
            
            --
            
            
            --
            
            
            5,200,000
            
            
            5
            
            
            46,293Purchase
                of common stock
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Exercise
                of warrants
            
            
            --
            
            
            --
            
            
            753,897
            
            
            1
            
            
            3,050Exercise
                of options
            
            
            --
            
            
            --
            
            
            4,473,683
            
            
            4
            
            
            3,806Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            14,166Warrants
                of common stock issued to related party as finder’s fee in private
                placement
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            114Warrants
                for common stock issued to note holders in exchange for note of
                predecessor
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            588Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Balance
                at December 31, 2005
            
            
            --
            
            $
            --
            
            
            37,831,896
            
            $
            38
            
            $
            210,758





*
      Amount
      less than one thousand dollars.





The
      accompanying notes are an integral part of the consolidated financial
      statements.





F-8


**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Statements of Changes in Stockholders’ Equity (continued)**





(in
      thousands, except share amounts)




**Treasury
                stock**
            
            **Unearned**
            
            **Deficit
                accumulated during the development****Shares**
            
            **Amount**
            
            **compensation**
            
            **stage**
            
            **Total****Amounts
                accumulated during the development stage (December 3, 1996 to December
                31,
                2005):**Contributed
                capital
            
            
            --
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            3,181Conversion
                of convertible notes of Partec into stock in Keryx
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            2,973Issuance
                of Series A convertible preferred stock to investors at $100 per
                share for
                cash (net of issuance expenses of $552)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            8,338Issuance
                of Series A convertible preferred stock at $0.001 par value to note
                holders in exchange for note of predecessor
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --*Issuance
                of common stock to technology licensors for technology
                license
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            360Issuance
                of common stock in public offering (net of issuance expenses of
                $5,419)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            75,790Issuance
                of common stock in private placement (net of issuance expenses of
                $1,205)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            45,795Issuance
                of common stock in connection with acquisition
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            6,325Receipt
                on account of shares issued in prior years
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            7Conversion
                of Series A convertible preferred stock to common stock
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (--)*Issuance
                of common stock in initial public offering, including exercise of
                overallotment (net of issuance expenses of $5,702)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            46,298Purchase
                of common stock
            
            
            56,100
            
            
            (89
            )
            
            --
            
            
            --
            
            
            (89
            )Exercise
                of warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            3,051Exercise
                of options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            3,810Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            --
            
            
            --
            
            
            (1,581
            )
            
            --
            
            
            12,585Warrants
                of common stock issued to related party as finder’s fee in private
                placement
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            114Warrants
                for common stock issued to note holders in exchange for note of
                predecessor
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            588Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (114,448
            )
            
            (114,448
            )Balance
                at December 31, 2005
            
            
            56,100
            
            $
            (89
            )
            $
            (1,581
            )
            $
            (114,448
            )
            $
            94,678





*
      Amount
      less than one thousand dollars.





The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-9


**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Statements of Cash Flows for the Year Ended December 31**





(in
      thousands)





**2005**
            
            **2004**
            
            **2003**
            
            **Amounts**
              **accumulated**
              **during
                the**
              **development**
              **stage**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (9,108
            )
            $
            (114,448
            )Adjustments
                to reconcile cash flows used in operating activities:Acquired
                in-process research and development
            
            
            --
            
            
            18,800
            
            
            --
            
            
            18,800Stock
                compensation expense (gain)
            
            
            1,369
            
            
            1,500
            
            
            (298
            )
            
            13,175Issuance
                of common stock to technology licensor
            
            
            --
            
            
            --
            
            
            --
            
            
            359Interest
                on convertible notes settled through issuance of preferred
                shares
            
            
            --
            
            
            --
            
            
            --
            
            
            253Depreciation
                and amortization
            
            
            190
            
            
            155
            
            
            940
            
            
            2,611Loss
                on disposal of property, plant and equipment
            
            
            2
            
            
            --
            
            
            86
            
            
            172Impairment
                charges
            
            
            --
            
            
            --
            
            
            2,482
            
            
            2,482Exchange
                rate differences
            
            
            --
            
            
            (3
            )
            
            13
            
            
            94Changes
                in assets and liabilities, net of effects of acquisitions:Decrease
                (increase) in other receivables and prepaid expenses
            
            
            (2,578
            )
            
            (43
            )
            
            54
            
            
            (2,829
            )Decrease
                (increase) in accrued interest receivable
            
            
            (192
            )
            
            (33
            )
            
            95
            
            
            (336
            )Decrease
                (increase) in security deposits
            
            
            (8
            )
            
            --
            
            
            --
            
            
            (8
            )Changes
                in deferred tax provisions and valuation allowance
            
            
            --
            
            
            --
            
            
            102
            
            
            --Increase
                (decrease) in accounts payable and accrued expenses
            
            
            1,975
            
            
            874
            
            
            22
            
            
            3,741Increase
                (decrease) in income taxes payable
            
            
            --
            
            
            --
            
            
            (177
            )
            
            --Increase
                (decrease) in accrued compensation and related liabilities
            
            
            193
            
            
            68
            
            
            (1,317
            )
            
            364(Decrease)
                in liability in respect of employee severance obligations
            
            
            --
            
            
            --
            
            
            (188
            )
            
            --Increase
                (decrease) in other liabilities
            
            
            230
            
            
            (63
            )
            
            --
            
            
            167Increase
                (decrease) in deferred revenue
            
            
            (37
            )
            
            (316
            )
            
            --
            
            
            (353
            )Net
                cash used in operating activities
            
            
            (25,751
            )
            
            (12,004
            )
            
            (7,294
            )
            
            (75,756
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of property, plant and equipment
            
            
            (964
            )
            
            (24
            )
            
            (3
            )
            
            (5,391
            )Proceeds
                from disposals of property, plant and equipment
            
            
            1
            
            
            --
            
            
            387
            
            
            425(Increase)
                in note and accrued interest receivable from related party
            
            
            --
            
            
            (4
            )
            
            (352
            )
            
            (356
            )(Increase)
                in other assets
            
            
            (23
            )
            
            (8
            )
            
            (65
            )
            
            (1,219
            )Proceeds
                from deposits in respect of employee severance obligations
            
            
            --
            
            
            --
            
            
            416
            
            
            --(Investment
                in) held-to-maturity short-term securities
            
            
            (1,122
            )
            
            (16,838
            )
            
            (16,298
            )
            
            (44,833
            )Proceeds
                from maturity of held-to-maturity short-term securities
            
            
            15,045
            
            
            11,459
            
            
            17,242
            
            
            43,746(Investment
                in) available-for-sale short-term securities
            
            
            (13,700
            )
            
            (6,025
            )
            
            --
            
            
            (19,725
            )Proceeds
                from sale of available-for-sale short-term securities
            
            
            8,675
            
            
            1,000
            
            
            --
            
            
            9,675(Investment
                in) held-to-maturity long-term securities
            
            
            (21,270
            )
            
            --
            
            
            --
            
            
            (21,270
            )Proceeds
                from maturity of held-to-maturity long-term securities
            
            
            185
            
            
            --
            
            
            --
            
            
            185Net
                cash provided by (used in) investing activities
            
            
            (13,173
            )
            
            (10,440
            )
            
            1,327
            
            
            (38,763
            )





The
      accompanying notes are an integral part of the consolidated financial
      statements.


F-10


**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Consolidated
      Statements of Cash Flows for the Year Ended December 31
      (continued)**





(in
      thousands)





**2005**
            
            **2004**
            
            **2003**
            
            **Amounts**
              **accumulated**
              **during
                the**
              **development**
              **stage**CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from short-term loans
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            500Proceeds
                from long-term loans
            
            
            --
            
            
            --
            
            
            --
            
            
            3,251Payment
                of assumed notes payable and accrued interest in connection with
                the
                ACCESS Oncology acquisition
            
            
            --
            
            
            (6,322
            )
            
            --
            
            
            (6,322
            )Issuance
                of convertible note, net
            
            
            --
            
            
            --
            
            
            --
            
            
            2,150Issuance
                of preferred shares, net
            
            
            --
            
            
            --
            
            
            --
            
            
            8,453Receipts
                on account of shares previously issued
            
            
            --
            
            
            --
            
            
            --
            
            
            7Proceeds
                from initial public offering, net
            
            
            --
            
            
            --
            
            
            --
            
            
            46,298Proceeds
                from secondary public offering, net
            
            
            75,790
            
            
            --
            
            
            --
            
            
            75,790Proceeds
                from private placements, net
            
            
            --
            
            
            31,662
            
            
            14,133
            
            
            45,795Proceeds
                from exercise of options and warrants
            
            
            1,610
            
            
            5,034
            
            
            181
            
            
            6,861Purchase
                of treasury stock
            
            
            --
            
            
            --
            
            
            (12
            )
            
            (89
            )Net
                cash provided by (used in) financing activities
            
            
            77,400
            
            
            30,374
            
            
            14,302
            
            
            182,694Cash
                acquired in acquisition
            
            
            --
            
            
            94
            
            
            --
            
            
            94Effect
                of exchange rate on cash
            
            
            --
            
            
            3
            
            
            (13
            )
            
            (94
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            38,476
            
            
            8,027
            
            
            8,322
            
            
            68,175Cash
                and cash equivalents at beginning of year
            
            
            29,699
            
            
            21,672
            
            
            13,350
            
            
            --CASH
                AND CASH EQUIVALENTS AT END OF YEAR
            
            $
            68,175
            
            $
            29,699
            
            $
            21,672
            
            $
            68,175NON
                - CASH TRANSACTIONSIssuance
                of common stock in connection with acquisition
            
            $
            --
            
            $
            6,325
            
            $
            --
            
            $
            6,325Issuance
                of contingent equity rights in connection with acquisition
            
            
            --
            
            
            4,004
            
            
            --
            
            
            4,004Assumption
                of liabilities in connection with acquisition
            
            
            --
            
            
            8,723
            
            
            --
            
            
            8,723Conversion
                of short-term loans into contributed capital
            
            
            --
            
            
            --
            
            
            --
            
            
            500Conversion
                of long-term loans into contributed capital
            
            
            --
            
            
            --
            
            
            --
            
            
            2,681Conversion
                of long-term loans into convertible notes of Partec
            
            
            --
            
            
            --
            
            
            --
            
            
            570Conversion
                of convertible notes of Partec and accrued interest into stock in
                Keryx
            
            
            --
            
            
            --
            
            
            --
            
            
            2,973Issuance
                of warrants to related party as finder’s fee in private
                placement
            
            
            --
            
            
            --
            
            
            --
            
            
            114Declaration
                of stock dividend
            
            
            --
            
            
            --
            
            
            --
            
            
            3SUPPLEMENTARY
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid for interest
            
            $
            --
            
            $
            1,026
            
            $
            1
            
            $
            1,166Cash
                paid for income taxes
            
            $
            --
            
            $
            1
            
            $
            60
            
            $
            432





*
      Amount
      less than one thousand dollars.





The
      accompanying notes are an integral part of the consolidated financial
      statements.


F-11


**Keryx
      Biopharmaceuticals, Inc. (A Development Stage Company)**


**Notes
      to the Consolidated Financial Statements**







**NOTE
      1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





**DESCRIPTION
      OF BUSINESS**





Keryx
      Biopharmaceuticals, Inc. (“Keryx” or the “Company”) is a biopharmaceutical
      company focused on the acquisition, development and commercialization of novel
      pharmaceutical products for the treatment of life-threatening diseases,
      including diabetes and cancer. The Company was incorporated in Delaware in
      October 1998 (under the name Paramount Pharmaceuticals, Inc., which was later
      changed to Lakaro Biopharmaceuticals, Inc. in November 1999, and finally to
      Keryx Biopharmaceuticals, Inc. in January 2000). The Company commenced
      activities in November 1999, and since then has operated in one segment of
      operations, namely the development and commercialization of clinical compounds
      and core technologies for the life sciences.





Until
      November 1999, most of the Company’s activities were carried out by Partec
      Limited, an Israeli corporation formed in December 1996, and its subsidiaries
      SignalSite Inc. (85% owned), SignalSite Israel Ltd. (wholly-owned), Vectagen
      Inc. (87.25% owned) and Vectagen Israel Ltd. (wholly-owned) (hereinafter
      collectively referred to as “Partec”). In November 1999, the Company acquired
      substantially all of the assets and liabilities of Partec and, as of that date,
      the activities formerly carried out by Partec were performed by the Company.
      On
      the date of the acquisition, Keryx and Partec were entities under common control
      (the controlling interest owned approximately 79.7% of Keryx and approximately
      76% of Partec) and accordingly, the assets and liabilities were recorded at
      their historical cost basis by means of “as if” pooling, with Partec being
      presented as a predecessor company. Consequently, these financial statements
      include the activities performed in previous periods by Partec by aggregating
      the relevant historical financial information with the financial statements
      of
      the Company as if they had formed a discrete operation under common management
      for the entire development stage.





The
      Company owns a 100% interest in each of ACCESS Oncology, Inc. (“ACCESS
      Oncology”) and Neryx Biopharmaceuticals, Inc., both U.S. corporations
      incorporated in the State of Delaware, and Keryx (Israel) Ltd. and Keryx
      Biomedical Technologies Ltd., each organized in Israel. In 2003, the Company’s
      subsidiaries in Israel ceased operations and are currently in the process of
      being closed down. Substantially all of the Company’s biopharmaceutical
      development and administrative activities during 2005 and 2004 were conducted
      in
      the United States of America.





On
      February 5, 2004, the Company completed the acquisition of ACCESS Oncology
      and
      its subsidiaries. The transaction was structured as a merger of AXO Acquisition
      Corp., a Delaware corporation and the Company’s wholly-owned subsidiary, with
      and into ACCESS Oncology, with ACCESS Oncology remaining as the surviving
      corporation and a wholly-owned subsidiary of the Company. The transaction was
      accounted for under the purchase method of accounting. See Note 6 - ACCESS
      Oncology Acquisition for additional information. The assets and liabilities
      of
      ACCESS Oncology that the Company acquired and assumed pursuant to the
      acquisition have been included in the Company’s consolidated financial
      statements as of February 5, 2004 *.*





The
      Company has not generated any revenues from its planned principal operations
      and
      is dependent upon significant financing to provide the working capital necessary
      to execute its business plan. **** If
      the
      Company determines that it is necessary to seek additional funding, there can
      be
      no assurance that the Company will be able to obtain any such funding on terms
      that are acceptable to it, if at all.





**PRINCIPLES
      OF CONSOLIDATION**





The
      consolidated financial statements include the financial statements of the
      Company and its wholly owned subsidiaries. Intercompany transactions and
      balances have been eliminated in consolidation.





**USE
      OF ESTIMATES**





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and judgments that
      affect the reported amounts of assets and liabilities and the disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the applicable reporting
      period. Actual results could differ from those estimates. Such differences
      could
      be material to the financial statements.





F-12


The
      Company believes its application of accounting policies, and the estimates
      inherently required therein, are reasonable. These accounting policies and
      estimates are regularly reevaluated, and adjustments are made when facts and
      circumstances dictate a change. Historically, the Company has found its
      application of accounting policies to be appropriate, and actual results have
      not differed materially from those determined using necessary
      estimates.





**CASH
      AND CASH EQUIVALENTS**





The
      Company considers all highly liquid investments with original maturities of
      three months or less to be cash equivalents.





**INVESTMENT
      SECURITIES**





Investment
      securities at December 31, 2005 and 2004 consist of short-term and long-term
      government, auction notes and corporate debt securities. The Company classifies
      its short-term and long-term debt securities as held-to-maturity, with the
      exception of auction notes securities, which are classified as
      available-for-sale. Held-to-maturity securities are those securities in which
      the Company has the ability and intent to hold the security until maturity.
      Held-to-maturity securities are recorded at amortized cost, adjusted for the
      amortization or accretion of premiums or discounts.





A
      decline
      in the market value of any held-to-maturity security below cost, that is deemed
      to be other than temporary, results in a reduction in the carrying amount to
      fair value. The impairment is charged to earnings and a new cost basis for
      the
      security is established. Premiums and discounts are amortized or accreted over
      the life of the related held-to-maturity security as an adjustment to yield
      using the effective interest method. Dividend and interest income are recognized
      when earned.





**PROPERTY,
      PLANT AND EQUIPMENT**





Property,
      plant and equipment are stated at historical cost. Depreciation is computed
      using the straight-line method over the estimated useful lives of the assets:





Estimated
              useful
                life
              (years)Office
                furniture and equipment
            3-7Computers,
                software and related equipment
            3





Leasehold
      improvements are amortized over the shorter of their useful life or the
      remaining term of the lease exclusive of renewal options. The Company will
      incur
      manufacturing capital expenditures relating to the scale-up for larger scale
      production. Accordingly, the Company’s manufacturing equipment costs are in
      accumulation and are not amortized or depreciated until ready for their intended
      use.





**INTANGIBLE
      ASSETS**





The
      Company expenses patent costs as incurred. Historically, certain acquired
      patents have been recorded at cost and are being amortized over a four-year
      period. The Company continually evaluates whether events and circumstances
      warrant the recognition of a reduction of carrying amounts.





**REVENUE
      RECOGNITION**





Revenues
      consist of clinical trial management and site recruitment services. Revenues
      generated from providing clinical trial management and site recruitment services
      are recognized at the time such services are provided. Deferred revenue is
      incurred when the Company receives a deposit or prepayment for services to
      be
      performed at a later date. Management fees accumulated
      during the development stage arose from provision of management services to
      a
      related company and were recognized ratably over the period for which the
      services were provided.





F-13


**COST
      OF SERVICES**





Cost
      of
      services consist of all costs specifically associated with client programs
      such
      as salary, benefits paid to personnel, payments to third-party vendors and
      systems and other support facilities associated with delivering services to
      the
      Company's clients. Cost of services are recognized at the time such services
      are
      performed.





**RESEARCH
      AND DEVELOPMENT COSTS**





Research
      and development costs are expensed as incurred. The Company makes
      estimates of costs incurred to date in relation to external clinical research
      organizations, or CROs, and clinical site costs. The Company analyzes the
      progress of clinical trials, including levels of patient enrollment, invoices
      received and contracted costs when evaluating the adequacy of the amount
      expensed and the related prepaid asset and accrued liability. Additionally,
      administrative costs related to external CROs are recognized on a straight-line
      basis over the estimated contractual period.





**INCOME
      TAXES**





Income
      taxes are accounted for under the asset and liability method. Deferred tax
      assets and liabilities are recognized for the future tax consequences
      attributable to temporary and permanent differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax bases and operating loss and tax credit carryforwards. Deferred
      tax assets and liabilities are measured using enacted tax rates expected to
      apply to taxable income in the years in which those temporary differences are
      expected to be recovered or settled. The effect on deferred tax assets and
      liabilities of a change in tax rates is recognized in income in the period
      that
      includes the enactment date. If the likelihood of realizing the deferred tax
      assets or liability is less than “more likely than not,” a valuation allowance
      is then created.





**STOCK
      - BASED COMPENSATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
      AMOUNTS)**





The
      Company applies the intrinsic value-based method of accounting prescribed by
      the
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” (“APB 25”), and related interpretations, including FASB
      Interpretation 44, “Accounting for Certain Transactions involving Stock
      Compensation, an Interpretation of APB Opinion No. 25,” to account for its
      fixed-plan stock options for employees and directors. Under this method,
      compensation expense is recorded on the date of grant only if the current market
      price of the underlying stock exceeded the exercise price. Statement of
      Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based
      Compensation” (“SFAS No. 123”) is applied to stock options and warrants granted
      to persons other than employees and directors. The Company has adopted the
      disclosure requirements of SFAS No. 123 and SFAS No. 148, “Accounting for
      Stock-Based Compensation—Transition and Disclosure,” (“SFAS No. 148”) for awards
      to its directors and employees.





The
      following is a pro forma presentation of reported net loss and net loss per
      share, calculated to show adjusted values had the compensation expenses for
      stock options granted under the Company’s stock option plans been determined
      based on fair value at the grant dates consistent with the method of SFAS No.
      123:





**For
                the year ended December 31**
            
            **Amounts
                accumulated during the development**(in
                thousands, except per share amounts)
            
            **2005**
            
            **2004**
            
            **2003**
            
            **stage**Net
                loss, as reported
            
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (9,108
            )
            $
            (114,448
            )Add:
                Stock-based compensation expense to employees and directors determined
                under the intrinsic value-based method, as included in reported net
                loss
            
            
            445
            
            
            667
            
            
            80
            
            
            10,179Deduct:
                Stock-based compensation expense to employees and directors determined
                under fair value based method
            
            
            (3,797
            )
            
            (3,770
            )
            
            (1,286
            )
            
            (20,216
            )Pro
                forma net loss
            
            $
            (30,247
            )
            $
            (36,046
            )
            $
            (10,314
            )
            $
            (124,485
            )Basic
                and diluted loss per common share:As
                reported
            
            $
            (0.78
            )
            $
            (1.10
            )
            $
            (0.43
            )
            $
            (6.34
            )Pro
                forma
            
            $
            (0.88
            )
            $
            (1.20
            )
            $
            (0.48
            )
            $
            (6.89
            )





F-14


The
      value
      of these options has been estimated using the Black-Scholes model. The weighted
      average fair market value of options granted during the year ended December
      31,
      2005 as of the date of the grant, was $7.84. The assumptions used in the
      calculation of the fair value of options granted during the year ended December
      31, 2005 were a weighted average expected term of 4.9 years, a weighted average
      expected volatility rate of 84.88% and a weighted average risk-free interest
      rate of 3.72%. The weighted average fair market value of options granted during
      the year ended December 31, 2004, as of the date of the grant, was $4.38. The
      assumptions used in the calculation of the fair value of options granted during
      the year ended December 31, 2004 were a weighted average expected term of 4.8
      years, a weighted average expected volatility rate of 84.24% and a weighted
      average risk-free interest rate of 2.85%. The weighted average fair market
      value
      of options granted during the year ended December 31, 2003, as of the date
      of
      the grant, was $0.93. The assumptions used in the calculation of the fair value
      of options granted during the year ended December 31, 2003 were a weighted
      average expected term of 4.0 years, a weighted average expected volatility
      rate
      of 82.74% and a weighted average risk-free interest rate of 2.39%.





**NET
      LOSS PER SHARE**





Basic
      net
      loss per share is computed by dividing the losses allocable to common
      stockholders by the weighted average number of shares of common stock
      outstanding for the period. Diluted net loss per share does not reflect the
      effect of shares of common stock to be issued upon exercise of stock options
      and
      warrants, as their inclusion would be anti-dilutive. The options and warrants
      exercisable as of December 31, 2005, 2004 and 2003, which are not included
      in
      the computation of net loss per share amounts, were 4,682,111, 3,807,576, and
      3,510,230,  respectively.





**IMPAIRMENT
      OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
      OF**





The
      Company accounts for impairment using the provisions of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.
      144”). This Statement requires that long-lived assets subject to amortization be
      reviewed for impairment whenever events or changes in circumstances indicate
      that the carrying amount of an asset may not be recoverable. Recoverability
      of
      assets to be held and used is measured by a comparison of the carrying amount
      of
      an asset to future cash flows expected to be generated by the asset or used
      in
      its disposal. If the carrying amount of an asset exceeds its estimated future
      cash flows, an impairment charge is recognized by the amount by which the
      carrying amount of the asset exceeds the fair value of the asset. Assets to
      be
      disposed of are separately presented in the balance sheet and reported at the
      lower of the carrying amount or fair value less costs to sell, and are no longer
      depreciated.





**BUSINESS
      ACQUISITIONS**





The
      Company accounts for acquired businesses using the purchase method of accounting
      which requires that the assets acquired and liabilities assumed be recorded
      at
      the date of acquisition at their respective fair values. Our consolidated
      financial statements and results of operations reflect an acquired business
      after the completion of the acquisition and are not retroactively restated.
      The
      cost to acquire a business, including transaction costs, is allocated to the
      underlying net assets of the acquired business in proportion to their respective
      fair values. Any excess of the purchase price over the estimated fair values
      of
      the net assets acquired is recorded as goodwill. Any excess of the net assets
      acquired over the purchase price represents negative goodwill.





The
      acquisition of ACCESS Oncology (see Note 6 - ACCESS Oncology Acquisition)
      resulted in negative goodwill. Since the negative goodwill was a result of
      not
      recognizing contingent consideration (i.e., the contingent equity rights),
      the
      lesser of the negative goodwill and the maximum value of the contingent equity
      rights at the date of the acquisition was recorded as if it were a liability,
      thereby eliminating the negative goodwill.





F-15


**CONCENTRATIONS
      OF CREDIT RISK**





The
      Company does not have significant off-balance-sheet risk or credit risk
      concentrations. The Company maintains its cash and cash equivalents, short-term
      and long-term investments with multiple financial institutions and invests
      in
      investment-grade securities with maturities of less than twenty-four
      months.





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**





In
      December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS No.
      123R”). SFAS No. 123R will replace SFAS No. 123, which was issued in 1995. SFAS
      123R requires that the fair value of the grant of employee stock options be
      reported as an expense. Historically, the Company has disclosed the pro forma
      expense effect of stock options granted under the Company’s stock option plans
      in Note 1 - Organization and Summary of Significant Accounting Policies:
      Stock-Based Compensation.





Under
      SFAS No. 123R, the Company would have been required to implement the new
      standard as of the beginning of the first interim or annual period that began
      after June 15, 2005. Calendar year-end companies, therefore, would have been
      permitted to follow the pre-existing accounting literature for the first and
      second quarters of 2005, but would be required to follow SFAS No. 123R for
      their
      third quarter reports.





On
      April
      15, 2005, the Securities and Exchange Commission (the “SEC”) approved a new rule
      permitting companies to implement SFAS No. 123R at the beginning of their first
      annual period, rather than the first interim period, beginning after June 15,
      2005. This means that the financial statements for a calendar year-end company
      do not need to comply with SFAS No. 123R until the first quarter of 2006.





On
      October 18, 2005, the FASB issued FASB Staff Position (FSP) 123(R)-2, “Practical
      Accommodation to the Application of Grant Date as Defined in FASB Statement
      No.
      123(R)” (“FSP-123(R)-2”). FSP-123(R)-2 provides guidance about the mutual
      understanding by the employee and employer of the key terms and conditions
      of a
      share-based payment award that is one of the criteria for determining when
      an
      award has been granted under SFAS No. 123R. Under FSP-123(R)-2, assuming all
      other criteria are met, a mutual understanding of the key terms and conditions
      of an award is presumed to exist at the date the award is approved in accordance
      with the relevant corporate governance requirements if (a) the recipient does
      not have the ability to negotiate the key terms and conditions of the award
      with
      the employer and (b) the key terms of the award are expected to be communicated
      to all of the recipients within a relatively short period of time from the
      date
      of approval. The guidance in FSP 123R-2 should be applied on initial adoption
      of
      SFAS-123R.





The
      Company plans to adopt SFAS No. 123R and FSP-123(R)-2 in the first quarter
      of
      2006. The estimated impact of adopting SFAS No. 123R and FSP-123(R)-2 will
      have
      a material impact on the Company’s consolidated financial
      statements.





**NOTE
      2 - CASH AND CASH EQUIVALENTS**





(in
                thousands)
            
            **December
                31, 2005**
            
            **December
                31, 2004**Money
                market funds
            
            $
            13,383
            
            $
            12,904Securities
                (original maturity less than 90 days)
            
            
            --
            
            
            1,249Checking
                and bank deposits
            
            
            54,792
            
            
            15,546Total
            
            $
            68,175
            
            $
            29,699





**NOTE
      3 - INVESTMENT SECURITIES**





The
      following tables summarize the Company’s investment securities at December 31,
      2005 and December 31, 2004 (regarding assumptions used for estimated fair value,
      see “Note 8 - Fair Value of Financial Instruments.”):





F-16


**December
                31, 2005**(in
                thousands)
            
            **Amortized
                cost**
            
            **Gross**
              **unrealized**
              **holding
                gains**
            
            **Gross**
              **unrealized**
              **holding
                losses**
            
            **Estimated**
              **fair
                value**Short-term
                investments:Obligations
                of domestic governmental agencies (mature between July and October
                2006)
            
            $
            7,150
            
            $
            --
            
            $
            (49
            )
            $
            7,101Auction
                notes **
            
            
            10,050
            
            
            --
            
            
            --
            
            
            10,050US
                corporate debt securities (mature between March and May
                2006)
            
            
            1,072
            
            
            --
            
            
            (4
            )
            
            1,068$
            18,272
            
            $
            --
            
            $
            (53
            )
            $
            18,219Long-term
                investments:Obligations
                of domestic governmental agencies (mature between January and July
                2007)
            
            $
            13,950
            
            $
            --
            
            $
            (90
            )
            $
            13,860US
                corporate debt securities
            
            
            --
            
            
            --
            
            
            --
            
            
            --$
            13,950
            
            $
            --
            
            $
            (90
            )
            $
            13,860





**December
                31, 2004**(in
                thousands)
            
            **Amortized
                cost**
            
            **Gross**
              **unrealized**
              **holding
                gains**
            
            **Gross**
              **unrealized**
              **holding
                losses**
            
            **Estimated**
              **fair
                value**Short-term
                investments:Obligations
                of domestic governmental agencies (mature between February and September
                2005)
            
            $
            12,911
            
            $
            --
            
            $
            (66
            )
            $
            12,845Auction
                notes **
            
            
            5,025
            
            
            --
            
            
            --
            
            
            5,025US
                corporate debt securities (mature between January and April
                2005)
            
            
            2,099
            
            
            --*
            
            
            (2
            )
            
            2,097$
            20,035
            
            $
            --*
            
            $
            (68
            )
            $
            19,967




*
            Amount
                less than one thousand dollars.


**
            Amortized
                cost approximates fair value. Unrealized gains and losses are not
                material.





**NOTE
      4 - PROPERTY, PLANT AND EQUIPMENT**





(in
                thousands)
            
            **December
                31, 2005**
            
            **December
                31, 2004**Manufacturing
                equipment
            
            $
            663
            
            $
            --Leasehold
                improvements
            
            
            16
            
            
            --Office
                furniture and equipment
            
            
            308
            
            
            104Computers,
                software and related equipment
            
            
            234
            
            
            1581,221
            
            
            262Accumulated
                depreciation and amortization
            
            
            (217
            )
            
            (117
            )Net
                book value
            
            $
            1,004
            
            $
            145





The
      Company will incur manufacturing capital expenditures relating to the scale-up
      for larger scale production. Accordingly, the Company’s manufacturing equipment
      costs are in accumulation and are not amortized or depreciated until ready
      for
      their intended use.





Depreciation
      expense for the years ended December 31, 2005, 2004 and 2003 was approximately
      $102,000, $67,000 and $841,000, respectively. The following table summarizes
      depreciation expense for the years ended December 31, 2005, 2004 and 2003.





F-17


**For
                the year ended December 31**(in thousands)
            
            **2005**
            
            **2004**
            
            **2003**Depreciation
                expense:Cost
                of services
            
            $
            4
            
            $
            7
            
            $
            --Research
                and development
            
            
            72
            
            
            44
            
            
            188General
                and administrative
            
            
            26
            
            
            16
            
            
            653Total
            
            $
            102
            
            $
            67
            
            $
            841





During
      2003, as part of the Company’s decision to vacate the Jerusalem facility, the
      Company reevaluated and significantly shortened the useful life of the leasehold
      improvements associated with its administrative facilities, resulting in
      accelerated depreciation of approximately $561,000 for the year ended December
      31, 2003. Following the accelerated depreciation, the leasehold improvements
      were completely written off in 2003. In addition, as part of the 2003
      restructuring, the Company recorded a non-cash impairment charge of
      approximately $1,695,000 for the year ended December 31, 2003, of which
      approximately $1,571,000 was included in research and development expenses
      and
      approximately $124,000 was included in general and administrative expenses.
      See
      Note 12 - Restructuring for additional information.





**NOTE
      5 - OTHER ASSETS**





(in
                thousands)
            
            **December
                31, 2005**
            
            **December
                31, 2004**Patents
                and other intangible assets
            
            $
            352
            
            $
            352Long-term
                deposits
            
            
            67
            
            
            59Deferred
                registration fees
            
            
            49
            
            
            26468
            
            
            437Accumulated
                patent amortization
            
            
            (308
            )
            
            (220
            )$
            160
            
            $
            217





Amortization
      expense for the years ended December 31, 2005, 2004 and 2003 was approximately
      $88,000, $88,000 and $99,000, respectively. The Company expects amortization
      expense for the years ended December 31, 2006 and 2007 to be approximately
      $44,000 and $0, respectively.





As
      part
      of the 2003 restructuring, the Company recorded a non-cash impairment charge
      of
      approximately $787,000 for the year ended December 31, 2003, all of which was
      included in research and development expenses. See Note 12 - Restructuring
      for
      additional information.





**NOTE
      6** **-
      ACCESS ONCOLOGY ACQUISITION**





On
      February 5, 2004, the Company acquired ACCESS Oncology, a related party, for
      a
      purchase price of approximately $19,502,000. The purchase price included the
      Company’s assumption of certain liabilities of ACCESS Oncology equal to
      approximately $8,723,000, the issuance of shares of the Company’s common stock
      valued at approximately $6,325,000, contingent equity rights valued at
      approximately $4,004,000 and transaction costs of approximately
      $450,000.





At
      the
      effective time of the merger, each share of ACCESS Oncology common stock,
      including shares issuable upon the exercise of options exercised before March
      1,
      2004, and upon the exercise of outstanding warrants, was converted into the
      right to share in the contingent equity rights pro rata with the other holders
      of ACCESS Oncology common stock. Pursuant to the merger agreement, 623,145
      shares of the Company’s common stock valued at approximately $6,325,000 have
      been issued to the former preferred stockholders of ACCESS Oncology. An
      additional 4,433 shares of the Company’s common stock are issuable to those
      preferred stockholders of ACCESS Oncology who have yet to provide the necessary
      documentation to receive shares of the Company’s common stock.





The
      contingent equity rights will be paid upon the achievement of the following
      milestones:





·
            500,000
                shares of the Company’s common stock upon enrollment of the first patient
                in a Keryx-sponsored Phase III (or other pivotal) clinical trial
                for any
                of the acquired ACCESS Oncology drug
                candidates;


·
            750,000
                shares of the Company’s common stock upon the first new drug application
                acceptance by the Food and Drug Administration, or FDA, for any of
                the
                acquired ACCESS Oncology drug candidates;




F-18


·
            1,750,000
                shares of the Company’s common stock upon the first FDA approval of any of
                the acquired ACCESS Oncology drug candidates;
                and


·
            372,422
                shares of the Company’s common stock following the first 12-month period
                that sales of all of the acquired ACCESS Oncology drug candidates
                combined
                exceeds $100 million.





In
      no
      event will the Company issue more than 4,000,000 shares of its common stock
      pursuant to the merger agreement. These 4,000,000 shares include 627,578 shares
      issued or issuable to date and any contingent shares as described above.
      Accordingly, the amount of the Company’s common stock deliverable to the former
      ACCESS Oncology stockholders as milestone consideration will be no more than
      3,372,422 shares. The Company’s stockholders approved the issuance of shares of
      its common stock payable as contingent milestone consideration at the 2004
      annual meeting of stockholders, which took place on June 10, 2004.





The
      ACCESS Oncology acquisition has been accounted for as a purchase by the Company
      under United States generally accepted accounting principles. Under the purchase
      method of accounting, the assets and liabilities assumed from ACCESS Oncology
      are recorded at the date of acquisition at their respective fair values. The
      consolidated financial statements and reported results of operations of the
      Company issued after completion of the acquisition reflect these values but
      will
      not be restated retroactively to reflect the historical financial position
      or
      results of operations of ACCESS Oncology.





The
      following represents the purchase price for ACCESS Oncology:





(in
                thousands, except share and per share amounts)Assumed
                liabilities
            
            
            
            
            $
            8,723Number
                of shares of Keryx common stock issued
            
            
            623,145Multiplied
                by Keryx’s volume-adjusted weighted average closing price per share
                measured over the last seven trading days immediately preceding the
                closing
            
            $
            10.15
            
            
            6,325Contingent
                equity rights
            
            
            
            
            
            4,004Other
                transaction costs
            
            
            
            
            
            450Total
                purchase price
            
            
            
            
            $
            19,502





The
      excess of the net assets acquired over the purchase price represented negative
      goodwill of approximately $4,004,000. Since the negative goodwill is a result
      of
      not recognizing contingent consideration (i.e., the contingent equity rights),
      the lesser of the negative goodwill ($4,004,000) and the maximum value of the
      contingent equity rights at the date of the acquisition ($34,275,000) has been
      recorded as a liability, thereby eliminating the negative goodwill. The value
      of
      the contingent equity rights of $34,275,000 was based on the volume-adjusted
      weighted average closing price per share of the Company’s common stock measured
      over the last seven trading days immediately preceding the closing of the
      acquisition ($10.15 per share) multiplied by 3,376,855 shares, which consist
      of
      the sum of the unissued amount of the Company’s common stock deliverable to the
      ACCESS Oncology stockholders as milestone consideration (3,372,422 shares)
      and
      to those preferred stockholders of ACCESS Oncology who have yet to provide
      the
      necessary documentation to receive shares of the Company’s common stock (4,433
      shares).





The
      purchase price allocation, which is considered final, is based on an estimate
      of
      the fair value of net assets acquired.





(in
                thousands)Allocation
                of purchase price:Net
                assets acquired
            
            
            $
            725Adjusted
                for write-off of existing intangible assets
            
            
            
            23Net
                tangible assets acquired
            
            
            
            702Acquired
                in-process research and development charge
            
            
            
            18,800Purchase
                price
            
            
            $
            19,502





F-19


As
      required by FASB Interpretation No. 4, "Applicability of FASB Statement No.
      2 to
      Business Combinations Accounted for by the Purchase Method" ("FIN 4"), the
      Company recorded a charge in 2004 of $18,800,000 for the portion of the purchase
      price allocated to acquired in-process research and development.





The
      following unaudited pro forma financial information presents the combined
      results of operations of the Company and ACCESS Oncology as if the acquisition
      had occurred as of the beginning of the periods presented. The unaudited pro
      forma financial information is not necessarily indicative of what the Company’s
      consolidated results of operations actually would have been had it completed
      the
      acquisition at the dates indicated. In addition, the unaudited pro forma
      financial information does not purport to project the future results of
      operations of the combined company.





(in
                thousands, except per share amounts)
            
            **2004**
            
            **2003**Revenue
            
            $
            911
            
            $
            786Net
                loss
            
            $
            (14,086
            )
            $
            (12,113
            )Basic
                and diluted loss per common share
            
            $
            (0.47
            )
            $
            (0.55
            )





The
      unaudited pro forma financial information above reflects the elimination of
      balances and transactions between the Company and ACCESS Oncology, which upon
      completion of the merger would be considered intercompany balances and
      transactions. The entries include the elimination of certain interest income
      and
      expense and the elimination of the reimbursement of salaries and related
      facility costs of two employees of ACCESS Oncology, both of which net to zero.
      In addition, the unaudited pro forma financial information above excludes the
      non-recurring, non-cash charge of $18,800,000 related to acquired in-process
      research and development in the year ended December 31, 2004.





**NOTE
      7 - STOCKHOLDERS’ EQUITY**





**PREFERRED
      STOCK**





The
      Company’s amended and restated certificate of incorporation allows it to issue
      up to 5,000,000 shares of preferred stock, $0.001 par value, with rights senior
      to those of the common stock.





**COMMON
      STOCK**





On
      December 30, 2005, the Company filed a shelf registration statement on Form
      S-3
      with the SEC, which
      the
      SEC declared effective on January 13, 2006.  The
      registration statement provides for the offering of up to $150 million of the
      Company’s common stock. The Company may offer these securities from time to time
      in response to market conditions or other circumstances if it believes such
      a
      plan of financing is in the best interest of the Company and its stockholders.
      The Company believes that the shelf registration provides it with the
      flexibility to raise additional capital to finance its operations as needed.





On
      July
      20, 2005, the Company completed a public offering of 5,780,000 shares of its
      common stock (including the exercise of a 750,000 over-allotment option granted
      to the underwriters) to investors at $14.05 per share. Total proceeds to the
      Company from this public offering were approximately $75.8 million, net of
      offering expenses of approximately $5.4 million. The shares were sold under
      a
      shelf registration statement on Form S-3 (File No. 333-119376) filed with the
      SEC on September 29, 2004, and declared effective by the SEC on October 13,
      2004. As part of the transaction, on July 11, 2005, the Company filed a
      registration statement on Form S-3 (File No. 333-126494 )
      with
      the SEC registering an additional 780,000 shares, which became effective upon
      filing.





In
      June
      2004, the Company’s stockholders approved an amendment to the Company’s amended
      and restated certificate of incorporation increasing by 20 million the number
      of
      shares of authorized common stock to 60 million shares.





In
      June
      2004, the Company’s stockholders approved the delisting of the Company’s common
      stock from the Alternative Investment Market of the London Stock Exchange,
      which
      became effective on August 10, 2004.





F-20


During
      2004, the Company issued 623,145 shares of its common stock, valued at
      approximately $6,325,000 million, to the preferred stockholders of ACCESS
      Oncology, in connection with the Company’s merger with ACCESS Oncology, which
      closed on February 5, 2004. An additional 4,433 shares of the Company’s common
      stock are issuable to those preferred stockholders of ACCESS Oncology who have
      yet to provide the necessary documentation to receive shares of the Company’s
      common stock. In addition, up to 3,372,422 shares of the Company’s common stock
      are deliverable to the ACCESS Oncology stockholders as contingent milestone
      consideration pursuant to the merger agreement. The Company’s stockholders
      approved the issuance of shares of its common stock payable as contingent
      milestone consideration in June 2004 (see Note 6 above).





On
      February 17, 2004, the Company completed a private placement of approximately
      3.2 million shares of its common stock to institutional investors at $10.00
      per
      share. Total net proceeds of this private placement were approximately $31.7
      million, net of offering expenses of approximately $0.3 million. In connection
      with this private placement, the Company filed a Registration Statement on
      Form
      S-3 (File No. 333-113654) on March 16, 2004, and Amendment No. 1 to the
      Registration Statement on Form S-3/A on April 1, 2004, which was declared
      effective by the SEC on May 3, 2004.





On
      November 20, 2003, the Company completed a private placement of approximately
      3.5 million shares of its common stock together with warrants for the purchase
      of an aggregate of 705,883 shares of its common stock at an exercise price
      of
      $6.00 per share. Total proceeds of this private placement were approximately
      $14.1 million, net of offering expenses of approximately $0.9 million. In
      addition, the Company issued to the placement agent a warrant to purchase 50,000
      shares of its common stock at an exercise price of $6.00. In connection with
      the
      private placement, the Company filed a Registration Statement of Form S-3 (File
      No. 333-111133) on December 12, 2003, and Amendment
      No. 1 to the Registration Statement on Form S-3/A on December 19, 2003, which
      was declared effective by the SEC  on
      December 19, 2003.





The
      Company completed its initial public offering of 4.6 million shares of its
      common stock at $10.00 per share pursuant to a Registration Statement on Form
      S-1 (File No. 333-37402), which was effective on July 28, 2000. Additionally,
      the underwriters exercised their over-allotment option and purchased an
      additional 600,000 shares of the Company’s common stock, at $10.00 per share, on
      August 30, 2000. Total proceeds of this offering, including the exercise of
      the
      over-allotment option, were approximately $46.3 million, net of underwriting
      fees and offering expenses of approximately $5.7 million.





The
      Company repurchased 9,800 shares of its common stock at an aggregate cost of
      approximately $12,000 and 46,300 shares of its common stock at an aggregate
      cost
      of approximately $77,000 during the years ended December 31, 2003 and 2002,
      respectively, pursuant to the stock repurchase program approved by the Company’s
      Board of Directors in November 2002. At December 31, 2003, the stock repurchase
      program ended.





During
      2002, the Company issued a total of 48,491 unregistered shares of its common
      stock with a weighted average fair value at grant date of approximately,
      $359,000, or $7.40 per share, to third parties.





**STOCK
      OPTION PLANS**





The
      Company has in effect the following stock option plans. Options granted
      typically vest over a three to four year period.





The
      Company has in effect the following stock option plans.





a.
            The
                “1999 Stock Option Plan” adopted in November 1999, pursuant to which the
                Company’s board of directors could grant stock-based awards to directors,
                consultants and employees. The plan authorizes grants to purchase
                up to
                4,230,000 shares of authorized but unissued common stock. The plan
                limits
                the term of each option, to a term of no more than twenty-five (25)
                years
                from the date of the grant, unless authorized by the board. The plan
                allows for administration by the board of directors or a committee
                appointed by the Board, which has the authority, in its discretion,
                to
                determine the terms and conditions of any option granted to a Company
                service provider, including the vesting
                schedule.





b.
            The
                “2000 Stock Option Plan” adopted in June 2000, pursuant to which the
                compensation committee of the Company’s board of directors could grant
                stock-based awards to directors, consultants and employees. The 2000
                plan
                authorizes grants to purchase up to 4,455,000 shares of authorized
                but
                unissued common stock. The plan limits the term of each option, to
                a term
                of no more than 10 years from the date of the grant, unless authorized
                by
                the board.





F-21


c.
            The
                “Non-Plan” adopted in February 2000, pursuant to which the Company’s board
                of directors granted options, which are not part of any plan, to
                non-employee directors of the Company to purchase up to 240,000 shares
                of
                authorized but unissued common stock. The options issued by the board
                of
                directors pursuant to the Non-Plan have a life of 10 years from the
                date
                of their grant.





d.
            The
                “2002 CEO Incentive Stock Option Plan” adopted in December 2002, pursuant
                to which the Company’s board of directors granted an option to the
                newly-appointed Chief Executive Officer of the Company to purchase
                up to
                2,002,657 shares of authorized but unissued common stock. The option
                has a
                term of no more than 10 years plus one day from the date of the grant,
                unless otherwise authorized by the Company’s board of directors. The
                option granted to the newly appointed Chief Executive Officer was
                part of
                a total grant of options issued pursuant to the 1999 Stock Option
                Plan,
                the 2000 Stock Option Plan and the 2002 CEO Incentive Stock Option
                Plan,
                to purchase a total of 4,050,000 shares of the Company’s common stock. Of
                these options, one-third (or 1,350,000) vest over a three-year period
                and
                two-thirds (or 2,700,000) vest upon the earlier of the achievement
                of
                certain performance-based milestones or December 23, 2012. In addition,
                in
                the event of a merger, acquisition or other change of control or
                in the
                event that the Company terminates the Chief Executive Officer’s
                employment, either without cause or as a result of his death or
                disability, or he terminates his employment for good reason, the
                exercisability of any of the options described in this paragraph
                that are
                unexercisable at the time of such event or termination shall accelerate
                and the time period during which he shall be allowed to exercise
                such
                options shall be extended to the shorter of two years from the date
                of the
                termination of his employment or December 24, 2012. Additionally,
                the
                Company’s board of directors shall have the discretion to accelerate all
                or a portion of these options at any
                time.





e.
            The
                “2004 President Incentive Stock Option Plan” adopted in February 2004,
                pursuant to which the Company’s board of directors granted an option to
                the newly-appointed President of the Company to purchase up to 1,000,000
                shares of authorized but unissued common stock. The option has a
                term of
                no more than 10 years plus one day from the date of the grant, unless
                otherwise authorized by the Company’s board of directors. The option
                granted to the newly appointed President was made pursuant to an
                employment following the acquisition of ACCESS Oncology, Inc. in
                February
                2004. Of these options, 166,667 vest over a three-year period and
                833,333
                vest upon the earlier of the achievement of certain performance-based
                milestones or January 2, 2014. In addition, in the event of a merger,
                acquisition or other change of control or in the event that the Company
                terminates the President’s employment, either without cause or as a result
                of his death or disability, or he terminates his employment for good
                reason, the exercisability of any of the options described in this
                paragraph that are unexercisable at the time of such event or termination
                shall accelerate and the time period during which he shall be allowed
                to
                exercise such options shall be extended to the shorter of two years
                from
                the date of the termination of his employment or January 2, 2014.
                Additionally, the Company’s board of directors shall have the discretion
                to accelerate all or a portion of these options at any time.





f.
            The
                “2004 Long-Term Incentive Plan” adopted in June 2004, pursuant to which
                the compensation committee of the Company’s board of directors could grant
                stock-based awards to directors, consultants and employees. The 2004
                plan
                authorizes grants to purchase up to 4,000,000 shares of authorized
                but
                unissued common stock. The plan limits the term of each option, to
                a term
                of no more than 10 years from the date of their grant.





The
      following table summarizes stock options authorized by the Company as of
      December 31, 2004.





**Stock
                option plan**
            
            **Exercise**
              **price
                per**
              **share**
            
            **Authorized**
            
            **Outstanding**
            
            **Exercised**
            
            **Exercisable**
            
            **Available**
              **for
                grant**1999
                Stock Option Plan
            
            $
            0.10
                - 1.30
            
            
            4,230,000
            
            
            681,095
            
            
            3,503,905
            
            
            507,424
            
            
            --2000
                Stock Option Plan
            
            
            1.07
                - 19.00
            
            
            4,455,000
            
            
            2,757,400
            
            
            807,278
            
            
            2,219,369
            
            
            890,322Non
                Plan
            
            
            0.33
            
            
            240,000
            
            
            60,000
            
            
            157,500
            
            
            60,000
            
            
            22,5002002
                CEO Incentive Stock Option Plan
            
            
            1.30
            
            
            2,002,657
            
            
            2,002,657
            
            
            --
            
            
            1,001,329
            
            
            --2004
                President Incentive Plan
            
            
            4.59
            
            
            1,000,000
            
            
            1,000,000
            
            
            --
            
            
            263,889
            
            
            --2004
                Long-Term Incentive Plan
            
            
            1.92
                - 16.67
            
            
            4,000,000
            
            
            1,523,500
            
            
            5,000
            
            
            308,125
            
            
            2,471,50015,927,657
            
            
            8,024,652
            
            
            4,473,683
            
            
            4,360,135
            
            
            3,384,322





F-22


A
      summary
      of the status of the Company’s stock options as of December 31, 2005, 2004,
      2003, and changes during the years then ended is presented in the tables
      below.





**Outstanding
                stock options****Shares**
              **available**
            
            **Number**
              **of
                shares**
            
            **Weighted-**
              **average**
              **exercise
                price**Balance,
                December 31, 2002
            
            
            1,388,630
            
            
            9,345,027
            
            
            1.51Restatement
            
            
            (45,000
            )Authorized
            
            
            --Granted
            
            
            (1,005,000
            )
            
            1,005,000
            
            
            1.35Exercised
            
            
            --
            
            
            (1,574,276
            )
            
            0.12Canceled
            
            
            771,442
            
            
            (771,442
            )
            
            5.10Balance,
                December 31, 2003
            
            
            1,110,072
            
            
            8,004,309
            
            
            1.42Authorized
            
            
            5,000,000Granted
            
            
            (1,870,000
            )
            
            1,870,000
            
            
            6.42Exercised
            
            
            --
            
            
            (2,184,438
            )
            
            1.35Canceled
            
            
            15,250
            
            
            (15,250
            )
            
            8.15Balance,
                December 31, 2004
            
            
            4,255,322
            
            
            7,674,621
            
            
            2.64Authorized
            
            
            --Granted
            
            
            (952,500
            )
            
            952,500
            
            
            11.50Exercised
            
            
            --
            
            
            (520,969
            )
            
            1.27Canceled
            
            
            81,500
            
            
            (81,500
            )
            
            11.96Balance,
                December 31, 2005
            
            
            3,384,322
            
            
            8,024,652
            
            
            3.69Exercisable
                at December 31, 2003
            
            
            
            
            
            3,510,230
            
            
            1.54Exercisable
                at December 31, 2004
            
            
            
            
            
            3,807,576
            
            
            1.75Exercisable
                at December 31, 2005
            
            
            
            
            
            4,360,135
            
            
            2.37





**For
                the year ended December 31****2005**
            
            **2004**
            
            **2003**Weighted-average
                fair value of options granted during the period at an exercise price
                equal
                to market price at issue date
            
            $
            7.84
            
            $
            4.37
            
            $
            0.83Weighted-average
                exercise price of options granted during the period at an exercise
                price
                equal to market price at issue date
            
            $
            11.50
            
            $
            6.42
            
            $
            1.35Weighted-average
                fair value of options granted during the period at an exercise price
                greater than market price at issue date
            
            
            N/A
            
            
            N/A
            
            $
            2.46Weighted-average
                exercise price of options granted during the period at an exercise
                price
                greater than market price at issue date
            
            
            N/A
            
            
            N/A
            
            $
            1.38





F-23


During
      2005, the compensation committee of the Company’s board of directors granted
      options to purchase 952,500 shares of the Company’s common stock to the
      Company’s employees, directors and consultants. As a result of these grants, the
      Company recorded non-cash compensation expense for grants to consultants of
      approximately $155,000 during 2005. The exercise price of the options granted
      during 2005 was between $11.22 and $16.67 per share and equaled the market
      value
      on the date of grant. Options and warrants for the purchase of 120,430 shares
      of
      the Company’s common stock were forfeited during 2005. In addition, options and
      warrants for the purchase of 678,616 shares of the Company’s common stock were
      exercised during 2005.





The
      following table summarizes information about stock options outstanding at
      December 31, 2005:





**Options
                outstanding**
            
            **Options
                exercisable****Range
                of**
              **exercise
                prices**
            
            **Number**
              **outstanding**
            
            **Weighted-**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighed-**
              **average**
              **exercise**
              **price**
            
            **Number**
              **exercisable**
            
            **Weighed-average**
              **exercise**
              **price**$
                0.10
            
            
            267,752
            
            
            13.0
            
            $
            0.10
            
            
            267,752
            
            $
            0.100.11
                - 0.50
            
            
            60,000
            
            
            4.0
            
            
            0.33
            
            
            60,000
            
            
            0.330.51
                - 3.00
            
            
            4,749,340
            
            
            7.1
            
            
            1.31
            
            
            3,181,840
            
            
            1.323.01
                - 5.75
            
            
            1,438,060
            
            
            7.8
            
            
            4.61
            
            
            519,292
            
            
            4.655.76
                - 10.00
            
            
            164,000
            
            
            7.6
            
            
            8.52
            
            
            84,563
            
            
            8.6210.01
                - 19.00
            
            
            1,345,500
            
            
            8.7
            
            
            11.51
            
            
            246,688
            
            
            11.968,024,652
            
            
            
            
            
            
            
            
            4,360,135





At
      December 31, 2005, 3,942,896 options issued to directors and employees and
      530,787 options issued to consultants have been exercised. The terms of the
      outstanding options at December 31, 2005 are as follows:





**TO
      DIRECTORS AND EMPLOYEES**





**Options
                outstanding**
            
            **Options
                exercisable****Range
                of**
              **exercise
                prices**
            
            **Number**
              **outstanding**
            
            **Weighted-**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighed-**
              **average**
              **exercise**
              **price**
            
            **Number**
              **exercisable**
            
            **Weighed-average**
              **exercise**
              **price**$
                0.10
            
            
            252,819
            
            
            13.0
            
            $
            0.10
            
            
            252,819
            
            $
            0.100.11
                - 0.50
            
            
            60,000
            
            
            4.0
            
            
            0.33
            
            
            60,000
            
            
            0.330.51
                - 3.00
            
            
            4,708,668
            
            
            7.1
            
            
            1.31
            
            
            3,141,168
            
            
            1.313.01
                - 5.75
            
            
            1,335,312
            
            
            7.9
            
            
            4.60
            
            
            444,513
            
            
            4.635.76
                - 10.00
            
            
            109,000
            
            
            7.9
            
            
            8.76
            
            
            50,563
            
            
            8.6110.01
                - 19.00
            
            
            1,123,000
            
            
            8.7
            
            
            11.56
            
            
            185,125
            
            
            11.947,588,799
            
            
            
            
            
            
            
            
            4,134,188





As
      of
      December 31, 2005, 3,808,333 options issued to directors and employees are
      milestone-based.





**TO
      CONSULTANTS**





**Options
                outstanding**
            
            **Options
                exercisable****Range
                of**
              **exercise
                prices**
            
            **Number**
              **outstanding**
            
            **Weighted-**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighed-**
              **average**
              **exercise**
              **price**
            
            **Number**
              **exercisable**
            
            **Weighed-average**
              **exercise**
              **price**$
                0.10
            
            
            14,933
            
            
            13.0
            
            $
            0.10
            
            
            14,933
            
            $
            0.100.11
                - 0.50
            
            
            --
            
            
            N/A
            
            
            N/A
            
            
            --
            
            
            N/A0.51
                - 3.00
            
            
            40,672
            
            
            7.5
            
            
            2.05
            
            
            40,672
            
            
            2.053.01
                - 5.75
            
            
            102,748
            
            
            7.1
            
            
            4.72
            
            
            74,779
            
            
            4.775.76
                - 10.00
            
            
            55,000
            
            
            7.1
            
            
            8.06
            
            
            34,000
            
            
            8.6310.01
                - 19.00
            
            
            222,500
            
            
            8.8
            
            
            11.25
            
            
            61,563
            
            
            12.00435,853
            
            
            
            
            
            
            
            
            225,947





F-24


As
      of
      December 31, 2005, 75,000 options issued to consultants are milestone-based.





The
      Company applies APB Opinion No. 25 in accounting for its options granted to
      directors and employees. For the years ended December 31, 2005, 2004 and 2003,
      the Company has recorded non-cash compensation expense of approximately
      $445,000, $667,000 and $65,000, respectively.





The
      Company applies EITF 96-18 “Accounting for Equity Instruments that are Issued to
      Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services,” in accounting for its options granted to consultants. For the years
      ended December 31, 2005, 2004 and 2003, the Company recorded non-cash
      compensation expense of approximately $924,000, $833,000 and $163,000,
      respectively. Unvested options are revalued at every reporting period and
      amortized over the vesting period in order to determine the compensation
      expense. The value of these options has been estimated using the Black-Scholes
      model under the assumptions stated above (see Note 1).





**WARRANTS**





A
      summary
      of the status of the Company’s warrants issued as of December 31, 2005, 2004,
      2003, and changes during the years then ended is presented in the tables
      below.





**Warrants**
            
            **Weighted-**
              **average**
              **exercise
                price**Balance,
                December 31, 2002
            
            
            1,044,801
            
            
            3.15Issued
            
            
            755,883
            
            
            6.00Exercised
            
            
            --
            
            
            --Canceled
            
            
            (558,307
            )
            
            5.75Balance,
                December 31, 2003
            
            
            1,242,377
            
            
            3.71Issued
            
            
            --
            
            
            --Exercised
            
            
            (348,824
            )
            
            6.00Canceled
            
            
            (375,000
            )
            
            0.01Balance,
                December 31, 2004
            
            
            518,553
            
            $
            4.86Issued
            
            
            --
            
            
            --Exercised
            
            
            (157,647
            )
            
            6.00Canceled
            
            
            (38,930
            )
            
            1.94Balance,
                December 31, 2005
            
            
            321,976
            
            $
            4.65





**For
                the year ended December
                31****2005**
            
            **2004**
            
            **2003**Weighted-average
                fair value of warrants granted during the period at an exercise price
                equal to market price at issue date
            
            
            N/A
            
            
            N/A
            
            
            N/AWeighted-average
                exercise price of warrants granted during the period at an exercise
                price
                equal to market price at issue date
            
            
            N/A
            
            
            N/A
            
            
            N/AWeighted-average
                fair value of warrants granted during the period at an exercise price
                greater than market price at issue date
            
            
            N/A
            
            
            N/A
            
            $
            3.45Weighted-average
                exercise price of warrants granted during the period at an exercise
                price
                greater than market price at issue date
            
            
            N/A
            
            
            N/A
            
            $
            6.00





F-25


As
      of
      December 31, 2005, 753,893 warrants have been exercised and no warrants have
      been cancelled as part of cashless exercises. The terms of outstanding warrants
      as of December 31, 2005 are as follows:





**Warrants
                outstanding**
            
            **Warrants
                exercisable****Range
                of**
              **exercise
                prices**
            
            **Number**
              **outstanding**
            
            **Weighted-**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighed-**
              **average**
              **exercise**
              **price**
            
            **Number**
              **exercisable**
            
            **Weighed-average**
              **exercise**
              **price**$
                0.01
            
            
            72,564
            
            
            3.2
            
            $
            0.01
            
            
            72,564
            
            $
            0.016.00
            
            
            249,412
            
            
            3.0
            
            
            6.00
            
            
            249,412
            
            
            6.00321,976
            
            
            3.1
            
            $
            4.65
            
            
            321,976
            
            $
            4.65





As
      part
      of the private placement completed on November 20, 2003, the Company issued
      warrants for the purchase of an aggregate of 705,883 shares of its common stock
      at an exercise price of $6.00. In addition, the Company issued to the placement
      agent in the transaction a warrant to purchase up to 50,000 shares of its common
      stock at an exercise price of $6.00. At the time of grant, the fair market
      value
      of each warrant was $3.46 per share. The warrants have a term of exercise of
      five years. As of December 31, 2005, 506,471 warrants that had been issued
      in
      the private placement have been exercised by the holders.





The
      Company applies EITF 96-18 in accounting for its warrants granted to
      non-employees and non-directors. For the years ended December 31, 2005, 2004
      and
      2003, the Company recorded non-cash compensation expense of $0, $0 and a credit
      of $527,000, respectively. Unvested warrants are revalued at every reporting
      period and amortized over the vesting period in order to determine the
      compensation expense.





The
      value
      of these warrants has been estimated using the Black-Scholes model. No warrants
      were issued in 2005 and 2004. The assumptions used in the calculation of the
      fair value for compensation expense during the year ended December 31, 2003
      were
      a weighted average expected life of 5 years, an expected volatility rate of
      84.80% and a risk-free interest rate of 3.2%.





**NOTE
      8 - FAIR VALUE OF FINANCIAL INSTRUMENTS**





The
      Company’s financial instruments at December 31, 2005 and 2004 consisted of cash
      and cash equivalents, investment securities, accrued interest receivable, other
      receivables, and accounts payable and accrued expenses.





The
      carrying amounts of all the financial instruments noted above, except for
      investment securities, approximate fair value for all years presented due to
      the
      relatively short maturity of these instruments. The carrying amount for
      investment securities (held-to-maturity) are based on the amortized cost for
      these investments at the reporting date. The difference between the carrying
      value and fair value of investment securities held-to-maturity is set forth
      in
      Note 3 above. The carrying amount of available-for-sale investment securities
      (auction notes) is based on cost, which approximates fair value due to the
      rate
      re-pricing mechanism.





**NOTE
      9 - INCOME TAXES**





As
      of
      December 31, 2005, the Company has U.S. net operating loss carryforwards of
      approximately $101.5 million which expire from 2019 through 2025. In addition,
      as of the date of the acquisition, ACCESS Oncology had U.S. net operating loss
      carryforwards of $14.9 million that start to expire in December 2019. Deferred
      tax assets of Partec were lost upon assumption of operations by the Company
      (see
      Note 1 - Organization and Summary of Significant Accounting Policies).





The
      Company has established a valuation allowance against its net deferred tax
      assets due to the Company’s pre-tax losses and the resulting likelihood that the
      deferred tax asset is not realizable. The valuation allowance for deferred
      tax
      assets was $57.9 million and $38.9 million as of December 31, 2005 and 2004,
      respectively. If the entire deferred tax asset were realized, $10.8 million
      would be allocated to paid-in-capital related to the tax effect of compensation
      deductions from the exercise of employee and consultant stock options. Due
      to
      the Company’s various equity transactions, the utilization of certain tax loss
      carryforwards is subject to annual limitations imposed by Internal Revenue
      Code
      Section 382 relating to the change of control provision.





F-26


In
      prior
      periods, the Company’s wholly-owned Israeli subsidiaries had generated taxable
      income in respect of services provided within the group, and therefore, the
      Company believed in the past that its deferred tax assets relating to the
      Israeli subsidiaries would be realized. With the cessation of operating
      activities in Israel during 2003 and the resulting absence of taxable income
      from the Israeli subsidiaries, the deferred tax asset was written off in
      2003.





In
      September 2001, one of the Company’s Israeli subsidiaries received the status of
      an "Approved Enterprise," a status which grants certain tax benefits in Israel
      in accordance with the "Law for the Encouragement of Capital Investments, 1959."
      Through December 31, 2003, our Israeli subsidiary, which ceased operations
      in
      2003, has received tax benefits in the form of exemptions of approximately
      $744,000 as a result of our subsidiary's status as an "Approved Enterprise."
      As
      part of the restructuring implemented during 2003 (see Note 12 - Restructuring),
      the Company closed down its Jerusalem laboratory facility. In October 2003,
      the
      subsidiary received a letter from the Israeli Ministry of Industry and Trade
      that its Approved Enterprise status was cancelled as of July 2003 and that
      past
      benefits would not need to be repaid. The Israeli tax authorities have yet
      to
      confirm this position; however, the Company believes that, based on the letter
      received from the Ministry of Industry and Trade, it is unlikely that past
      benefits will need to be repaid, and therefore, the Company has not recorded
      any
      charge with respect to this potential liability.





The
      tax
      expense reported in prior periods primarily related to the subsidiaries in
      Israel. Income tax expense attributable to income from continuing operations
      was
      $0, $1,000 and $(27,000), for the years ended December 31, 2005, 2004 and 2003,
      respectively, and differed from amounts computed by applying the US federal
      income tax rate of 35% to pretax loss.





**For
                the year ended December 31,**(in
                thousands)
            
            **2005**
            
            **2004**
            
            **2003**Losses
                before taxes on income, as reported in the consolidated statements
                of
                operations
            
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (9,135
            )Computed
                “expected” tax benefit
            
            
            (9,413
            )
            
            (11,530
            )
            
            (3,197
            )Increase
                (decrease) in income taxes resulting from:Expected
                benefit from state & local taxes
            
            
            (3,379
            )
            
            (2,853
            )
            
            (868
            )Change
                in state and local effective tax rate
            
            
            (3,130
            )
            
            --
            
            
            1,601Permanent
                differences, including IPR&D of $6,580 in 2004
            
            
            (571
            )
            
            6,586
            
            
            1Effect
                of foreign operations
            
            
            --
            
            
            143
            
            
            901Change
                in the balance of the valuation allowance for deferred tax assets
                allocated to income tax expense
            
            
            16,493
            
            
            7,654
            
            
            1,535$
            --
            
            $
            --
            
            $
            (27
            )





The
      significant components of deferred income tax expense (benefit) attributable
      to
      loss from operations are as follows:





**For
                the year ended December 31,**(in
                thousands)
            
            **2005**
            
            **2004**
            
            **2003**Deferred
                tax benefit
            
            $
            (18,931
            )
            $
            (19,104
            )
            $
            (1,433
            )Federal
                deferred tax benefit relating to the exercise of stock
                options
            
            
            2,438
            
            
            5,926
            
            
            --Federal
                deferred tax benefit relating to ACCESS Oncology
            
            
            --
            
            
            5,524
            
            
            --Increase
                in the valuation allowance for deferred tax assets
            
            
            16,493
            
            
            7,654
            
            
            1,535$
            --
            
            $
            --
            
            $
            102





The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004
      are presented below.





F-27


(in
                thousands)
            
            **December
                31, 2005**
            
            **December
                31, 2004**Deferred
                tax assets/(liabilities):Net
                operating loss carryforwards
            
            $
            45,697
            
            $
            26,903Net
                operating loss carryforwards (ACCESS Oncology)
            
            
            6,128
            
            
            6,128Non-cash
                compensation
            
            
            2,298
            
            
            2,281Research
                and development
            
            
            2,457
            
            
            2,748Depreciation
                and amortization
            
            
            870
            
            
            538Accrued
                compensation
            
            
            357
            
            
            278Other
                temporary differences
            
            
            68
            
            
            68Net
                deferred tax asset, excluding valuation allowance
            
            
            57,875
            
            
            38,944Less
                valuation allowance
            
            
            (57,875
            )
            
            (38,944
            )Net
                deferred tax assets
            
            $
            --
            
            $
            --





**NOTE
      10 - INTEREST AND OTHER INCOME, NET**





The
      components of interest and other income, net are as follows:





**For
                the year ended December 31,**(in
                thousands)
            
            **2005**
            
            **2004**
            
            **2003**Interest
                income
            
            $
            2,317
            
            $
            690
            
            $
            272Interest
                expense and other bank charges
            
            
            --
            
            
            (27
            )
            
            (25
            )Other
                income
            
            
            --
            
            
            107
            
            
            --$
            2,317
            
            $
            770
            
            $
            247





In
      2004,
      other income consisted of a one-time payment of $107,000 from a related-party
      service agreement that terminated in 2004.





**NOTE
      11 - COMMITMENTS AND CONTINGENCIES**





**Research
      & Development Agreements**





The
      Company has entered into various research and development agreements ( primarily
      relating to the Company’s pivotal Phase III and Phase IV clinical program for
      Sulonex ) under
      which it is obligated to make payments of approximately $85,457,000 through
      December 2010. The following table shows future research and development payment
      obligations by period as of December 31, 2005.





(in
                thousands)
            
            2006
            
            2007
            
            2008
            
            2009
            
            2010Research
                and development agreements
            
            $
            31,051
            
            $
            24,321
            
            $
            16,430
            
            $
            13,514
            
            $
            141





The
      table
      above includes certain commitments that are contingent upon our continuing
      development of our drug candidates.





**Leases**





The
      Company leases its office space under lease agreements that expire through
      2010.
      Total rental expense was approximately $514,000, $240,000 and $614,000 for
      the
      years ended December 31, 2005, 2004, and 2003, respectively.





Future
      minimum lease commitments as of December 31, 2005 are approximately $2,879,000
      through 2010. The following table shows future minimum lease commitments by
      period as of December 31, 2005.





(in
                thousands)
            
            2006
            
            2007
            
            2008
            
            2009
            
            2010Operating
                leases
            
            $
            630
            
            $
            597
            
            $
            596
            
            $
            597
            
            $
            459





F-28


During
      2004, the Company entered into a lease arrangement with its President, Dr.
      Craig
      Henderson, for the utilization of part of his residence for office space
      associated with the Company’s employees in San Francisco, California.  The
      Company has expensed $48,000 and $50,000 in 2005 and 2004, respectively,
      pursuant to the terms of this arrangement, which amounts have been included
      in
      accounts payable and accrued expenses in the accompanying balance sheets as
      of
      December 31, 2005 and 2004, respectively. ****





**Royalty
      And Contingent Milestone Payments**





The
      Company has licensed the patent rights to its drug candidates from others.
      These
      license agreements require the Company to make
      contingent milestone payments to certain of its licensors. In addition,
      under these agreements, the Company must pay royalties on sales of products
      resulting from licensed technologies. The commitments described in this
      paragraph are not reflected in the table above.





The
      Company has undertaken to make contingent milestone payments to certain of
      our
      licensors of up to approximately $57.1 million over the life of the licenses,
      of
      which approximately $44.2 million will be due upon or following regulatory
      approval of the licensed drugs. In certain cases, such payments will reduce
      any
      royalties due on sales of related products. In the event that the milestones
      are
      not achieved, the Company remains obligated to pay one licensor $50,000 annually
      until the license expires. As of December 31, 2005, the Company has recorded
      a
      total of $1,750,000 in license and milestone payments in regard to these license
      agreements.





The
      Company has also committed to pay to the former stockholders of ACCESS Oncology
      certain contingent equity rights if its drug candidates meet certain development
      milestones (see Note 6 -- Access Oncology Acquisition).





In
      addition, pursuant to his employment agreement, the Company’s Chief Executive
      Officer is entitled to receive a one-time $2.0 million performance-based cash
      bonus upon our achievement of certain levels of market capitalization or working
      capital.





**NOTE
      12 - RESTRUCTURING**





In
      2003,
      the Company implemented and completed a strategic reorganization, which the
      Company sometimes refers to as the “2003 restructuring.” As a result of this
      reorganization the Company ceased all early-stage research and development
      activities, ceased operations in its Jerusalem lab facility and completed the
      disposition of its fixed assets in Israel. The 2003 restructuring included
      a
      17-person reduction in the Company’s workforce, primarily in Israel. As part of
      the 2003 restructuring, the Company reevaluated its long-lived assets in
      accordance with SFAS No. 144 and recorded a non-cash impairment charge of
      approximately $2,482,000 for the year ended December 31, 2003, of which
      approximately $2,358,000 was included in research and development expenses
      and
      approximately $124,000 was included in general and administrative expenses.
      The
      impairment charge included a write-off of approximately $1,695,000 in fixed
      assets and approximately $787,000 in intangible assets. In addition, with the
      Company’s decision to vacate the Jerusalem facility, the Company reevaluated and
      significantly shortened the useful life of the leasehold improvements associated
      with its administrative facilities, resulting in accelerated depreciation of
      approximately $561,000 for the year ended December 31, 2003. In addition, upon
      vacating the facility in Jerusalem, the landlord of that facility claimed a
      bank
      guarantee in the amount of approximately $222,000 that was previously provided
      as security in connection with the lease agreement. At December 31, 2005 and
      2004, respectively, there were no liabilities associated with the 2003
      restructuring accrued for on the Company’s balance sheet.





The
      following table summarizes restructuring expenses that were incurred by the
      Company in 2003 that were not part of the Company’s ongoing accrual for employee
      severance benefits made throughout the employment term in accordance with
      Israeli law.





F-29


(in
                thousands)
            
            **2003**Other
                research and development:Impairment
                charge
            
            $
            2,358Realization
                of bank guarantee in connection with lease agreement
            
            
            144Severance
                charge
            
            
            4Total
                other research and development
            
            
            2,506Other
                general and administrative:Impairment
                charge
            
            
            124Realization
                of bank guarantee in connection with lease agreement
            
            
            78Severance
                charge
            
            
            --Accelerated
                depreciation
            
            
            561Total
                other general and administrative
            
            
            763Total
            
            $
            3,269





**NOTE
      13 - LITIGATION**





In
      July
      2003, Keryx (Israel) Ltd., one of the Company’s Israeli subsidiaries, vacated
      its Jerusalem facility, after giving advance notice to RMPA Properties Ltd.,
      the
      landlord. On May 1, 2005, the landlord filed suit in the Circuit Court of
      Jerusalem in Jerusalem, Israel, claiming that Keryx (Israel) Ltd., among other
      parties, was liable as a result of the alleged breach of the lease agreement.
      In
      addition to Keryx (Israel) Ltd., the landlord brought suit against Keryx
      Biomedical Technologies Ltd., another of the Company’s Israeli subsidiaries,
      Keryx Biopharmaceuticals, Inc., Michael S. Weiss, the Company’s Chairman and
      Chief Executive Officer, and Robert Trachtenberg, a former employee of Keryx.
      The amount demanded by the landlord totals 4,345,313 NIS or approximately
      $946,000 at the December 31, 2005, exchange rate, and includes rent for the
      entire remaining term of the lease, as well as property taxes and other costs
      allegedly incurred by the landlord. In August 2003, the landlord claimed a
      bank
      deposit, in the amount of $222,000, which was previously provided as security
      in
      connection with the lease agreement. The Company intends to vigorously defend
      the suit. In July 2005, Keryx (Israel) Ltd. and Keryx Biomedical Technologies
      Ltd. filed an answer to the landlord’s complaint. In October 2005, Keryx
      Biopharmaceuticals, Inc. filed an answer to the landlord’s complaint. Generally,
      each answer challenges the merits of the landlord’s cause of action as to each
      defendant. All defendants, except Keryx (Israel) Ltd., have also filed a motion
      to dismiss the complaint. The plaintiff has filed a response to each answer
      and
      a hearing date has been set by the Circuit Court of Jerusalem. To date, the
      Company has not yet recorded a charge to reflect any potential liability
      associated with this lawsuit, as it is too early to accurately estimate the
      amount of the charge, if any.





F-30





SIGNATURES





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





Date:
      March 7, 2006.




**KERYX
                BIOPHARMACEUTICALS, INC.**By:
            /s/
                Michael S. Weiss**Michael
              S. Weiss****Chairman
                and Chief Executive
                Officer**





POWER
      OF
      ATTORNEY





KNOW
      ALL
      MEN BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints each of Michael S. Weiss and Ronald C. Renaud, Jr.,
      his
      true and lawful attorney-in-fact and agent, with full power of substitution
      and
      resubstitution, for him and his name, place and stead, in any and all
      capacities, to sign any or all amendments (including post-effective amendments)
      to this annual report on Form 10-K, and to file the same, with all exhibits
      thereto and other documents in connection therewith, with the SEC, granting
      unto
      said attorney-in-fact and agent, full power and authority to do and perform
      each
      and every act and thing requisite and necessary to be done in and about the
      premises, as fully to all intents and purposes as he might or could do in
      person, hereby ratifying and confirming all that said attorney-in-fact and
      agent
      or any of his substitutes, may lawfully do or cause to be done by virtue
      hereof.





Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      Form 10-K has been signed by the following persons on behalf of the Registrant
      on March 7, 2006, and in the capacities indicated:





**Signatures**
            
            **Title**/s/
                Michael S. Weiss
              
              Michael
                S. Weiss
            
            Chairman
                and Chief Executive Officer
              (principal
                executive officer)/s/
                Ronald C. Renaud, Jr.
              
              Ronald
                C. Renaud, Jr.
            
            Senior
                Vice President, Chief Financial Officer, Secretary and
                Treasurer
              (principal
                financial officer)/s/
                Ron Bentsur
              
              Ron
                Bentsur
            
            Principal
                Accounting Officer/s/
                I. Craig Henderson, M.D.
              
              I.
                Craig Henderson, M.D.
            
            President
                and Director/s/
                Malcolm Hoenlein
              
              Malcolm
                Hoenlein
            
            Director/s/
                Lawrence Jay Kessel, M.D.
              
              Lawrence
                Jay Kessel, M.D.
            
            Director/s/
                Peter Salomon, M.D.
              
              Peter
                Salomon, M.D.
            
            Director/s/
                Eric A. Rose, M.D.
              
              Eric
                A. Rose, M.D.
            
            Director/s/
                Lindsay A. Rosenwald, M.D.
              
              Lindsay
                A. Rosenwald, M.D.
            
            Director/s/
                Jonathan Spicehandler, M.D.
              
              Jonathan
                Spicehandler, M.D.
            
            Director





46


**EXHIBIT
      INDEX**





**Exhibit****Number**
            **Exhibit
                Description**10.20†
            Employment
                Agreement between Ronald C. Renaud, Jr. and Keryx Biopharmaceuticals,
                Inc., dated as of February 14, 2006.10.21*
            License
                Agreement between Keryx Biopharmaceuticals, Inc. and Panion & BF
                Biotech, Inc. dated as of November 7, 2005.21.1
            List
                of subsidiaries of Keryx Biopharmaceuticals, Inc.23.1
            Consent
                of KPMG LLP.24.1
            Power
                of Attorney of Director and Officers of Keryx Biopharmaceuticals,
                Inc.
                (included herein).31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
                dated
                March 7, 2006.31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
                dated
                March 7, 2006.32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
                March 7,
                2006.32.2
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
                March 7,
                2006.





*
            Confidential
                treatment has been requested with respect to the omitted portions
                of this
                exhibit.




†
            Indicates
                management contract or compensation plan or
                arrangement.