**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, 2006.**


**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:**


Common
      Stock, Par Value $0.001 Per Share


(Title
      of
      Class)





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


None





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 $557,961,054 as of
      June 30, 2006, based on the closing sale price of such stock as reported on the
      Nasdaq Global Market .





There
      were 43,518,008 shares of the registrant’s common stock outstanding as of March
      8, 2007.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant’s Proxy Statement for the 2007 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, 2006**





**TABLE
      OF CONTENTS**





**Page**SPECIAL
                CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS**PART
                I**ITEM
                1
            Business
            2ITEM
                1A
            Risk
                Factors
            23ITEM
                1B
            Unresolved
                Staff Comments
            32ITEM
                2
            Properties
            32ITEM
                3
            Legal
                Proceedings
            32ITEM
                4
            Submission
                of Matters to a Vote of Security Holders
            33**PART
                II**ITEM
                5
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            33ITEM
                6
            Selected
                Financial Data
            36ITEM
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            37ITEM
                7A
            Quantitative
                and Qualitative Disclosure About Market Risk
            46ITEM
                8
            Financial
                Statements and Supplementary Data
            46ITEM
                9
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosures
            46ITEM
                9A
            Controls
                and Procedures
            46ITEM
                9B
            Other
                Information
            46**PART
                III**ITEM
                10
            Directors,
                Executive Officers and Corporate Governance
            47ITEM
                11
            Executive
                Compensation
            47ITEM
                12
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            47ITEM
                13
            Certain
                Relationships and Related Transactions and Director
                Independence
            47ITEM
                14
            Principal
                Accountant Fees and Services
            47**PART
                IV**ITEM
                15
            Exhibits
                and Financial Statement Schedules
            48





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 other 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, regulatory approval, and
                commercialization of SulonexTM,
                ZerenexTM,
                KRX-0401, and our additional product candidates or any other products
                we
                may acquire or in-license;




·
            expectations
                for incurring 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,” “we,” “us”
and “our” refer to Keryx Biopharmaceuticals, Inc., our predecessor company and
      our respective subsidiaries.*





**ITEM
      1. BUSINESS.**





**OVERVIEW**





We
      are a
      biopharmaceutical company focused on the acquisition, development and
      commercialization of medically important, 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-0601
            
            Multiple
                forms of cancer
            
            Phase
                IIKRX-0404
            
            Multiple
                forms of cancer
            
            Pre-clinical***Neurology***KRX-0501
            
            Neurological
                disorders
            
            Pre-clinical




**OUR
      STRATEGY**





Our
      mission is to create long-term shareholder value by acquiring, developing and
      commercializing medically important, novel pharmaceutical products for the
      treatment of life-threatening diseases, including diabetes and cancer. Our
      strategy to achieve this mission is to:





·
            seek
                to acquire medically important, novel drug candidates in late pre-clinical
                or early clinical development;





·
            utilize
                our clinical development capabilities to manage and drive our drug
                candidates through the clinical development process to approval;
                and





·
            commercialize
                our drug candidates, either alone or in partnership, which we believe
                is
                important to provide maximal shareholder
                value.


2




Under
      our
      strategy, we currently plan over the next twelve months to:





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





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





·
            continue
                to build our clinical development and regulatory capabilities and
                conduct
                additional pre-clinical, toxicology and clinical trials for our portfolio
                products, including Zerenex, KRX-0401, KRX-0402 and KRX-0601;
                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. 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 an 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 trials 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 20.8 million people
      in the United States (approximately 7% of the population) who have diabetes.
      Of
      this population, approximately 14.6 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, the ADA estimates that
      approximately 40% of all diabetics in the United States, or approximately eight
      million people, have diabetic nephropathy. Diabetes is the most common cause
      of
      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 could result in diminished kidney function and progress
      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
                release of abnormal amounts of protein or albumin into the urine
                is called
                proteinuria or 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, it is believed that interstitial structures are
      exposed to limited amounts of albumin. It is believed that the exposure of
      the
      interstitial structures to excessive 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.





*Clinical
      Data*





*European
      Clinical Data*





In
      Europe, there have been more than 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.


4





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 pilot 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 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 Phase III clinical trial, 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.





The
      data
      is presented in two ways. First, the 200mg arm is compared to placebo because
      the 200mg is the dose being used in our Phase III and Phase IV clinical trials,
      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.


5





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 Sulonex for the treatment of diabetic nephropathy
      was
      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 were consistent with the patient’s co-morbidities of
      diabetes, hypertension, and/or hyperlipidemia, (iii) no clinically relevant
      bleeding events were documented in either study and no changes in coagulation
      parameters assessed during the Phase II Pilot study were 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 Sulonex is permissible, 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 the following
      SAEs:





Placebo
              N=47
            
            200
                mg
              N=50
            
            400
                mg
              N=52No.
                of SAEs
            
            No.
                of Patients
            
            No.
                of SAEs
            
            No.
                of Patients
            
            No.
                of SAEs
            
            No.
                of Patients4
            
            4
                (8.5%)
            
            23
            
            16
                (32%)
            
            4
            
            4
                (7.7%)





All
      of
      the SAEs were considered by the Investigators to be unlikely to be related
      to
      study drug. The DSMC concluded that the SAE event rate appeared to be higher
      in
      the sulodexide 200mg/d group compared to both placebo and sulodexide 400mg/d
      groups (no dose dependent effect) and the pattern of SAE did not indicate any
      common trends. No additional safety signals emerged from a review of the adverse
      events, the biochemical data and the coagulation parameters. No abnormalities
      of
      coagulation were in any group and no excessive bleeding was seen in the patients
      receiving either the 200mg/d or 400mg/d dosage of sulodexide.


6





In
      the
      Long-Term Open-Label Tolerability and Safety study, there have been twenty-seven
      SAEs in fourteen patients.





*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 final results from our Phase II study of Sulonex
      for
      diabetic nephropathy at the American Society of Nephrology’s (ASN) Renal Week.
      Interim 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 above under “U.S.- based Clinical Data.”





In
      November 2006, we announced that the DSMC responsible for monitoring Sulonex
      in
      the Phase III microalbuminuria and Phase IV macroalbuminuria studies recently
      met. Following a review of the blinded and unblinded data from both studies,
      the
      DSMC concluded that it saw no cogent reason to recommend alteration or
      termination of either trial. The DSMC raised no safety concerns regarding
      Sulonex or the trials.





In
      February 2007, we announced that we had completed the enrollment portion of
      the
      Phase III clinical trial. We expect to complete the randomization of all
      patients by the end of the first half of 2007.


7





In
      March
      2007, we announced that the DSMC responsible for monitoring Sulonex in the
      Phase
      III microalbuminuria and Phase IV macroalbuminuria studies met again. Following
      a review of the blinded and unblinded data from both studies, the DSMC once
      again concluded that there is no cogent reason to recommend alteration or
      termination of either trial. The DSMC raised no safety concerns regarding
      Sulonex or the trials.





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, if any, by the FDA.





***Zerenex*** *TM*





*Overview*





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.





*Market
      Opportunity*





Phosphate
      retention and the resulting hyperphosphatemia in
      patients with ESRD on dialysis are usually associated with secondary
      hyperparathyroidism, renal osteodystrophy, soft tissue mineralization and the
      progression of renal failure. ESRD patients usually rquire treatment with
      phosphate-binding agents to lower and maintain serum phosphorus at acceptable
      levels.





Aluminum-type
      phosphate binders were widely used in the past. However, the systemic absorption
      of aluminum from these agents and the potential toxicity associated with their
      use no longer make these type of binders a viable treatment option.





Calcium-type
      phosphate binders are commonly used to bind dietary phosphate, however, they
      promote positive net calcium balance and an increased risk of metastatic
      calcification in many patients, especially in those patients taking vitamin
      D
      analogs and those with adynamic bone disease.





Sevelamer,
      a polyallylamine-hydrochloride, nonabsorbed cationic polymers that binds
      phosphate anions through ion exchange and hydrogen binding has been developed
      as
      an alternative phosphate binder. Compared to calcium-type binder, fewer coronary
      and aortic calcifications have been documented, however, the non-specific
      binding of vitamins, nutrients, and concomitantly administered medications
      are
      of major concerns. In addition, the lowering of serum phosphorus levels with
      this polymer is debatable since a target serum phosphorus level <5.5 mg/dL
      cannot be achieved in a majority of patients when this polymer is used as
      monotherapy.





Lanthanum-type
      phosphate binders are another alternative. Lanthanum is a rare earth element
      and
      is minimally absorbed in the gastrointestinal tract. Lower level tissue
      deposition has been demonstrated in animals, particularly in bone and liver.
      However, the long-term effects due to the accumulation of lanthanum in these
      tissues have not been clearly determined.





The
      need
      for alternative phosphate-binding agents have long been recognized. Zerenex
      has
      the potential to be an effective and safe treatment in lowering and/or maintain
      serum phosphorus levels <5.5 mg/dL in patients with ESRD and
      hyperphosphatemia.





*Clinical
      Data*





In
      June
      2006, we announced final results from the Phase II multi- center study entitled:
      “A randomized, double-blind, placebo-controlled, dose ranging study of the
      effects of Zerenex on serum phosphate in patients with end stage renal disease
      (ESRD).” This Phase II study was conducted under an IND sponsored our licensors
      in both the United States and Taiwan.





From
      this
      Phase II study, the investigators concluded that Zerenex appeared to have an
      acceptable safety and tolerability profile at the 2, 4, and 6g/day dose. The
      optimum dose of Zerenex in this study was 6g/day at which dose it appeared
      to be
      efficacious, safe and well tolerated as treatment for hyperphosphatemia in
      hemodialysis patients. Additionally, the investigators found that Zerenex
      therapy for up to 28 days had no statistically significant effect on serum
      iron,
      ferritin, transferrin saturation, or total iron binding capacity.





The
      Phase
      II study was designed to determine the safety and efficacy of several doses
      of
      Zerenex in patients with ESRD who were undergoing hemodialysis. In this study,
      each of three Zerenex doses (2g, 4g and 6g) administered daily with meals was
      compared to placebo. Patients who had been on other phosphate binders prior
      to
      enrolling in this study underwent a 1-2-week washout period prior to
      randomization. Patients who had a serum phosphorous level greater than or equal
      to 5.5 mg/dl and less than or equal to 10 mg/dl by the end of this washout
      period were eligible to be randomized to one of four treatment groups at a
      ratio
      of 2:2:2:1, (Zerenex 2g, 4g, 6g and placebo, respectively) and were treated
      for
      28 days. The primary endpoint for this study was the change in serum phosphorous
      concentration at day 28 relative to baseline.


8





Of
      the
      116 patients randomized in the study, 111 patients were evaluable for efficacy
      at 28 days and were included in the analysis. At day 28, there was a
      statistically significant dose response to Zerenex in reducing serum phosphorous
      concentration (p=0.0073). In the 6g/day Zerenex group the mean decrease in
      serum
      phosphorous concentration was statistically significant when compared with
      placebo (p=0.0119) (see Table 1). There was also a statistically significant
      dose response to Zerenex in the calcium x phosphorous (Ca x P) product at day
      28
      (p=0.0158). In the 6g/day Zerenex group the mean decrease in Ca x P product
      when
      compared with placebo was statistically significant (p=0.0378) (See Table 2).




Table
                1: Changes in Serum Phosphorous Concentration (mg/dL) on day
                28
              compared
                to day 0 (baseline) at Zerenex doses of 2, 4 and 6 g/day.Placebo
              (n=16)
            
            2g/day
              (n=31)
            
            4g/day
              (n=32)
            
            6g/day
              (n=32)Day
                0 (Baseline)*
            
            
            7.2
                (1.4
            )
            
            7.2
                (1.2
            )
            
            7.1
                (1.3
            )
            
            7.3
                (1.3
            )Day
                28 (End of Treatment Period)*
            
            
            7.2
                (1.2
            )
            
            6.9
                (2.2
            )
            
            6.0
                (1.3
            )
            
            5.8
                (1.8
            )Placebo
                Comparison:Mean
                Difference from Placebo
            
            
            
            
            
            -0.02
            
            
            -1.1
            
            
            -1.5P-value
            
            
            
            
            
            NS
            
            
            0.06
            
            
            0.0119Baseline
                Comparison:Mean
                Difference from Baseline
            
            
            -0.1
            
            
            -0.3
            
            
            -1.1
            
            
            -1.5P-value
            
            
            NS
            
            
            NS
            
            
            NS
            
            
            <0.01*
                mean (standard deviation)





Table
                2: Changes in the Calcium x Phosphorous (mg/dL) on day 28
              compared
                to day 0 (baseline) at Zerenex doses of 2, 4 and 6 g/day.Placebo
              (n=16)
            
            2g/day
              (n=31)
            
            4g/day
              (n=32)
            
            6g/day
              (n=32)Day
                0 (Baseline)*
            
            
            62.8
                (13.9
            )
            
            62.9
                (13.2
            )
            
            63.5
                (10.7
            )
            
            65.8
                (12.2
            )Day
                28 (End of Treatment Period)*
            
            
            63.2
                (12.6
            )
            
            61.7
                (21.3
            )
            
            55.4
                (13.4
            )
            
            54.1
                (17.7
            )Placebo
                Comparison:Mean
                Difference from Placebo
            
            
            
            
            
            -0.9
            
            
            -7.91
            
            
            -11.4P-value
            
            
            
            
            
            0.8950
            
            
            0.1375
            
            
            0.0378Baseline
                Comparison:Mean
                Difference from Baseline
            
            
            -0.3
            
            
            -1.1
            
            
            -8.1
            
            
            -11.7P-value
            
            
            NS
            
            
            NS
            
            
            NS
            
            
            <0.01*mean
                (standard deviation)





There
      were no deaths over the course of the 28 day study and there were no serious
      adverse events that were deemed by the investigators to be definitely related
      to
      Zerenex. The majority of adverse events were of mild severity. Seven (43.8%),
      13
      (39.4%), 9 (26.5%), and 14 (42.4%) patients in the placebo, 2, 4, and 6g
      treatment groups, respectively, experienced no adverse events more severe than
      mild and 1 (6.3%), 0 (0.0%), 2 (5.9%), 1 (3.0%), of the placebo, 2,4, and 6
      grams per day groups, respectively, experienced at least one severe adverse
      event. Possibly or probably related adverse effects occurred in 4 (25.0%),
      7
      (21.2%), 8 (23.5%), and 7 (21.2%) of the placebo, 2, 4, and 6 grams per day
      groups, respectively.





In
      addition, 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 3 and 4 below.





Table
      3—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.


9





Table
      4—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.





*Development
      Status*





In
      July
      2006, we met with the FDA to discuss further development of Zerenex and Phase
      III study design and requirements prior to moving into Phase III. To support
      higher doses and longer duration of treatment in Phase III, we agreed with
      the
      FDA to conduct additional studies. As agreed with the FDA, chronic toxicity
      studies in animals are being conducted, as well as a shorter-term high-dose
      tolerance and safety study in patients. As a result of conversations with the
      leadership of the CSG as well as the FDA during 2006, we plan to run an
      additional Phase II, short-term exposure study (28-days) to evaluate the safety
      of higher doses of Zerenex.  Prior to commencing this study, we wanted to
      complete chronic toxicology studies in rodents and non-rodents to evaluate
      the
      effect of higher doses in the human high-dose Phase II study.  This
      evaluation is underway in rodents and we are currently trying to determine
      the
      most appropriate non-rodent model to assess the toxicology of an iron-based
      compound. We now plan to commence the high-dose exposure clinical trial in
      the
      second half of 2007.  Consequently, we are now targeting commencement of
      the Phase III pivotal program in the first half of 2008.





**Oncology**





***KRX-0401***





*Overview*





We
      are
      also developing KRX-0401 (perifosine), which is a novel, first-in-class, oral
      anti-cancer agent that modulates the Akt, and a number of other key signal
      transduction pathways, including the JNK and MAPK pathways, all of which are
      pathways associated with programmed cell death, cell growth, cell
      differentiation and cell survival. High levels of activated Akt (pAkt) are
      seen
      frequently in many types of cancer and have been correlated with poor prognosis
      in patients with soft-tissue sarcoma, gastric, hepatocellular, endometrial,
      prostate, renal cell, head and neck cancers and hematological malignancies,
      as
      well as glioblastoma. The majority of tumors expressing high levels of pAkt
      were
      high-grade, advanced stage or had other features associated with poor prognosis.
      High pAkt is often seen in tumors that are resistant to conventional cancer
      treatments, including radiotherapy, chemotherapy, endocrine therapy, and
      especially therapy with some of the newer biologicals.




The
      effects of KRX-0401 on Akt are of particular interest because of 1) the
      importance of this pathway in the development of most cancers; 2) the evidence
      that it is often activated in tumors that are resistant to other forms of
      anticancer therapy; and 3) and the difficulty encountered thus far in the
      discovery of drugs that will inhibit this pathway without causing excessive
      toxicity. It is plausible that KRX-0401 may be useful in combination to reduce
      the resistance to other cancer treatments.


10





To
      date,
      over 1,200 patients have been treated with KRX-0401 in trials conducted both
      in
      the United States and Europe. Its safety profile is distinctly different from
      that of most cytotoxic agents. It does not appear to cause myelosuppression
      (depression of the immune system that may lead to life threatening infections),
      thrombocytopenia (a decrease in platelets that may result in bleeding), skin
      rash, flu-like symptoms or alopecia (hair loss); all of these toxicities occur
      frequently with many of the currently available treatments for cancer. The
      main
      side effects of perifosine are nausea, vomiting, diarrhea and fatigue, but
      these
      are either mild or non-existent in doses that are known to induce tumor
      regression.





In
      Phase
      I/II trials, perifosine has induced tumor regressions and/or caused disease
      stabilization in a variety of tumor types. KRX-0401 has shown single agent
      partial responses or long term disease stabilizations in solid tumors including,
      renal, hepatocellular, sarcoma and prostate cancer. There is also evidence
      of
      activity in hematological malignancies, especially multiple myeloma. Responding
      patients, including stable disease, have been treated for months to more than
      three years.





*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.





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 malignancy. 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 bortezomib (Velcade ® ),
      dexamethasone and a number of other drugs used to treat multiple
      myeloma.





Six
      Phase
      I studies of KRX-0401 have been completed, three in Europe by Zentaris and
      three
      in the United States 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 of 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 these six tumor types. 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 most
      of
      these 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
      very 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.


11





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.





In
      June
      2006, we announced data of KRX-0401 in patients with advanced renal cell
      carcinoma, or advanced RCC. These patients were a cohort of a Phase II,
      multi-center trial of KRX-0401 conducted by Keryx that included multiple tumor
      types. All patients in this study were to have had prior standard therapy.
      Although the extent of prior treatment varied with tumor type, most patients
      had
      received two chemotherapy regimens for metastatic disease. An interim analysis
      was performed at the end of the first year of accrual, and the results in the
      renal group met protocol requirements for expansion of this cohort. The study
      is
      ongoing.





Thirteen
      patients with advanced RCC were enrolled in the study and seven were evaluable
      for response. Three of the patients (43%) had a partial response and an
      additional two patients (29%) achieved long-term stable disease. Two of the
      patients experienced progression of the disease. Four patients were inevaluable
      because they stopped treatment early (42-62 days) and their disease was not
      evaluated at the time drug was stopped. Two patients have not been on study
      long
      enough to reach the first point of evaluation. Responses were scored using
      RECIST criteria.





**Response**
            
            **N
                (%)**
            
            **Duration
                (months)**Partial
                Response
            
            
            3
                (43
            %)
            
            4,
                4+, 9Stable
                Disease
            
            
            2
                (29
            %)
            
            8+,
                11Progression
            
            
            2
                (29
            %)
            
            2,
                3Too
                Early
            
            
            2Not
                Evaluable
            
            
            4




Times
      with '+' meaning patient still stable or responding at time of analysis.





In
      December 2006, we reported interim results from the Phase II study of KRX-0401
      in patients with advanced relapsed and refractory multiple
      myeloma .
      The
      interim data analysis showed that KRX-0401 alone or in combination with
      dexamethasone has activity in patients with advanced, relapsed/refractory
      multiple myeloma, achieving response and/or stabilization of disease in 69%
      of
      evaluable patients to date. In this 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.





A
      total
      of 55 patients (30 men and 25 women, median age 63 years, range 38-79) have
      been
      treated to date. All had relapsed and refractory multiple myeloma, with a median
      of four lines of prior treatment (range 2 - 11). Prior therapy included
      dexamethasone (95%), thalidomide (89%), bortezomib (78%), lenalidomide (31%)
      and
      stem cell transplant (73%). Among the 33 patients that were evaluable for
      response, best response (EBMT/Blade criteria) to single agent KRX-0401 after
      two
      cycles was stable disease (<25% reduction in M-protein) in 13 patients (39%). Dexamethasone was
      added in 30 of 55 patients with PD, with 23 patients evaluable for response
      on
      the combination, reported as follows:





**Perifosine
                + Dex**
            
            **N
                (%)**
            
            **Duration
                (wks)**PR
            
            
            2
                (9
            %)
            
            13+,
                17+MR
            
            
            4
                (17
            %)
            
            4,
                16+, 28+, 30+Stable
                Disease
            
            
            11
                (48
            %)
            
            6
                - 20+ (median 18)**4
                pts ongoing at 16, 18, 20 and 20
                weeks




12


The
      most
      common grade 3/4 adverse events were nausea (7%); vomiting (4%); diarrhea (2%);
      fatigue (2%), and increased creatinine (8% in the context of PD and light chain
      nephropathy). Dose reduction (150 to 100 or 50 mg/d) was required in 16 patients
      and seven patients discontinued treatment due to adverse events. Attributable
      toxicities otherwise proved manageable with appropriate supportive care.
      KRX-0401 was generally well tolerated, with no peripheral neuropathy or DVT
      seen.





*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 and breast cancer and sarcoma, and combination studies with a number
      of
      standard anti-cancer treatments, such as gemcitabine, paclitaxel, docetaxel,
      pemetrexed, capecitabine, doxorubicin, Doxil Ò ,
      irinotecan, 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
      December 2006, we announced the initiation of a multi-center Phase I clinical
      program to explore the convenient all-oral combination of KRX-0401,
      Revlimid ® and
      dexamethasone for the treatment of relapsed or refractory multiple myeloma.
      KRX-0401 is also currently being evaluated in an ongoing multi-center Phase
      II
      study as a single agent and in combination with dexamethasone as a treatment
      for
      relapsed or relapsed/refractory multiple myeloma and in an ongoing multi-center
      Phase I/II clinical study in combination with Velcade ® (bortezomib) for injection for the treatment for multiple myeloma.





In
      December 2006, we announced the initiation of a corporate-sponsored Phase II
      clinical program to evaluate KRX-0401 as a treatment for rare sarcomas. This
      Phase II study will be conducted by the Sarcoma Alliance for Research through
      Collaboration (SARC) multi-center network, which includes nationally recognized
      sarcoma centers and investigators throughout the United States. This clinical
      trial is entitled “A Phase II Trial of Perifosine in Patients with
      Chemo-Insensitive Sarcomas.” In this Phase II study, the single agent activity
      of KRX-0401 is being evaluated in patients with chondrosarcoma, alveolar soft
      part sarcomas and extra-skeletal myxoid chondrosarcomas. Patients will be
      treated with KRX-0401 until disease progression. This study follows previous
      Phase I and Phase II trials of perifosine in patients with chemo-insensitive
      sarcoma that showed responding patients experienced very little toxicity and
      the
      duration of responses observed on both weekly and daily dosing schedules varied
      from six months to more than 18 months. Furthermore, some of the partial
      responses occurred in patients with sarcoma subtypes that have been
      traditionally unresponsive to conventional therapy.





We
      plan
      to commence additional trials in 2007.





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, MGMT. MGMT confers resistance to certain
      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 cyclophosphamide, ifosphamide, 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
      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. Two company-sponsored, Phase II clinical
      trials for KRX-0402 are ongoing.





Investigators
      at Duke University led by Dr Henry Friedman performed a Phase I study of one
      day
      of temozolomide in combination with O6-BG. One patient with anaplastic
      astrocytoma previously resistant to temozolomide obtained a complete remission
      which has been ongoing for 3+ years. In a Phase II study of temozolomide
      resistant patients, 1/33 patients with glioblastoma and 3/32 patients with
      either anaplastic astrocytoma, or AA, or anaplastic oligodendroma, AO, obtained
      partial remissions to the combination of temozolomide and O6-BG. The dose of
      temozolomide was 200 mg/m 2 in the
      Phase I study and 472 mg/m 2 in the
      Phase II study.


13




The
      single day schedule for temozolomide was chosen at that time because data had
      only been generated on suppression of MGMT in tumors by O6-BG for up to 48
      hours. However, pre-clinical models had suggested this may not be the optimum
      schedule for O6-BG and temozolomide. In
      a
      xenograft model, it was demonstrated that O6-BG
      did
      not significantly increase the growth delay induced by a single 200 mg/kg dose
      of temozolomide compared to temozolomide alone, but when the same dose was
      divided into five equal daily doses there was a significant increase in tumor
      growth delay. A Phase I study at Duke University evaluated a five day regimen
      of
      temozolomide in combination with O6-BG. All patients received 200
      mg/m 2 of
      temozolomide on day one and four equal doses on days two through five. The
      maximum tolerated dose in that study was 200 mg/m 2 of
      temozolomide on day one and 50 mg/m 2 /day
      for
      days two through five. This schedule is now being evaluated in a Phase II study
      being performed at 16 university and community sites to confirm the AA/AO
      results seen at Duke University. The study uses a two-stage design. The first
      stage of the design calls for up to 41 patients to be evaluated. The first
      patient was entered on the study in October 2006. Accrual to the study is
      continuing.





***KRX-0601
      (7-hydroxystaurosporine)***





KRX-0601
      is a novel multi-kinase inhibitor for the treatment of cancer which, in
      pre-clinical models, has demonstrated a synergistic effect with agents
      inhibiting the PI3K pathway, including KRX-0401. KRX-0601 is currently in
      several Phase II clinical trials both as a single agent and in combination
      with
      other anticancer agents which are being conducted under the direction and
      sponsorship of the National Cancer Institute. KRX-0601 is an anticancer drug
      that belongs to the family of drugs called staurosporine analogs which have
      demonstrated an ability to inhibit multiple kinases involved in cell-cycle
      progression and apoptosis, including Chk-1 and PDK1. In pre-clinical studies,
      KRX-0601 has demonstrated synergistic effect with DNA-damaging agents including
      chemotherapy and radiation therapy. In-vitro, KRX-0601 has been shown to be
      synergistic with agents affecting the PI3-K pathway including KRX-0401 and
      mTOR
      inhibitors. In clinical trials, as reported by investigators at the National
      Cancer Institute, durable single-agent responses have been seen in patients
      with
      anaplastic large-cell lymphoma. We expect to continue exploring the potential
      utility of KRX-0601 over the next year.





***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, currently with a goal of
      entering clinical development in 2007.





**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 $10 million to $20 million,
      and we believe that the Phase III will be completed in the first half of 2008.





With
      respect to KRX-0401, KRX-0402, KRX-0601 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,
      KRX-0601 and Zerenex are in Phase II clinical development. Phase II clinical
      development is exploratory by design and looks at different doses and disease
      settings and thus is highly unpredictable, and the length of time required
      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.


14





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.





**Accumin** **TM**





On
      April
      6, 2006, Accumin Diagnostics, Inc., our wholly-owned subsidiary, completed
      the
      acquisition of Accumin TM ,
      a
      novel, patent protected, diagnostic for the direct measurement of total,
      intact urinary albumin, from AusAm Biotechnologies, Inc. We believe that the
      acquisition of Accumin may help increase our exposure to physicians that treat
      diabetes, the target market for Sulonex, by emphasizing the importance of early
      detection of microalbuminuria.





**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, when appropriate, 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 guarantee
      the scope of protection of the issued patents, or that such patents will survive
      a validity or enforceability challenge, or that any 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
      a
      patent is issued to a third party containing one or more preclusive or
      conflicting claims, and those claims are ultimately determined to be valid
      and
      enforceable, we may be required to obtain a license under such patent or to
      develop or obtain alternative technology. In the event of a litigation involving
      a third party claim, an adverse outcome in the litigation could subject us
      to
      significant liabilities to such third party, require us to seek a license for
      the disputed rights from such third party, and/or require us to cease use of
      the
      technology. Further, 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 involve substantial costs.





***Sulonex***





Pursuant
      to our license for Sulonex, we initially had the rights to ten patent families,
      including nine families of issued United States patents and foreign
      counterparts, and one family of a pending United States patent application
      and
      foreign counterparts. However, we 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, retinopathy or neuropathy. In
      addition, we subsequently filed five additional United States patent
      applications and certain foreign counterparts relating to this product, which
      applications are currently pending.The remaining licensed patents, and
      the additional patent applications, are being maintained throughout the
      territories in which they were filed.


15





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. 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
      United States patent to at least 2017. We 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, Inc., or 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 a
      United States patent and foreign counterparts directed to a pharmaceutical
      composition comprising KRX-0402 expiring in 2010 (with extension expected
      through 2015) and a series of United States patents and foreign counterparts
      directed to derivatives of KRX-0402 expiring in 2011 to 2019.





Pursuant
      to our license agreement for KRX-0601, we have the exclusive commercial rights
      to a series of patent applications worldwide excluding Japan. These patents
      and
      patent applications cover composition of matter and process of making for UCN-01
      and liposomal formulations of UCN-01. The composition of matter patent expires
      in June 2007. The method of use patents expire from 2013 to 2017.





Pursuant
      to our license for Zerenex with Panion & BF Biotech, Inc., or Panion, 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
      ESRD, as well as a method for the manufacture of Zerenex. Panion holds one
      use
      patent expiring 2017 (with extensions expected through 2020) 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 that we will be the first to receive
      FDA approval for such drugs so as to be eligible for market
      exclusivity protection. With respect to KRX-0402 and KRX-0601, we may rely
      predominantly on the market exclusivity provided under the orphan drug
      regulations as the patents on these drugs may expire prior to
      commercialization.





**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.


16




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





Under
      a
      license agreement with Alfa Wassermann, we have the exclusive rights to
      sulodexide (Sulonex) for the treatment of 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,
      royalties and certain milestone payments. Under the license, we must use our
      reasonable best efforts to commercially exploit and market sulodexide. In
      certain circumstances Alfa Wassermann is entitled to use proprietary information
      developed by us and, if it chooses to do so, will be liable to pay a percentage
      of the expenses incurred by us to develop such proprietary information. If
      the
      license is not terminated sooner, it will terminate upon the later of the date
      of expiration of the last claim under the licensed patent rights or ten years
      from our first commercial sale of a licensed product.





***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 ten 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 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. 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.





***Kyowa
      Hakko Kogyo Co., Ltd.***





In
      September 2006, we entered into an exclusive license agreement with Kyowa Hakko
      Kogyo Co., Ltd. of Tokyo, Japan, or Kyowa, for the worldwide development and
      commercialization rights, excluding Japan, to KRX-0601. Kyowa is entitled to
      milestone payments as well as royalties on product sales, if any. The license
      terminates upon the expiration of all underlying patent rights.


17





***AusAm
      Biotechnologies, Inc.***





In
      April
      2006, Accumin Diagnostics, Inc., or ADI, our wholly-owned subsidiary, completed
      the acquisition of Accumin TM ,
      a
      novel, patent protected, diagnostic for the direct measurement of total,
      intact urinary albumin, from AusAm Biotechnologies, Inc., or AusAm. ADI may
      be
      required to pay up to a maximum of $16.1 million in royalties on revenue from
      a
      next generation product following FDA marketing approval. In addition, payment
      of AusAm liabilities by ADI under license agreements in the amount of $180,000
      remains outstanding as of December 31, 2006, to be paid over the next 27
      months.





**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
      limited experience in manufacturing products for clinical or commercial
      purposes. 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. In addition, we have entered into an agreement
      with the same manufacturer to build a larger scale manufacturing suite within
      their current facility, which they will operate on our behalf. We believe this
      suite will be suitable to manufacture launch and initial commercialization
      (1 to
      3 years) quantities of Sulonex. As we move forward, we plan to build additional
      manufacturing capacity to meet the future demands for Sulonex. As with all
      heparin-like compounds, the end product is highly sensitive to the manufacturing
      process utilized. Accordingly, as we scale-up, we will need to accurately
      reproduce the established process on the larger scale to ensure successful
      commercialization of Sulonex. There can be no assurance that we will be
      successful in this endeavor. Additionally, as we scale-up, we have incurred,
      and
      will continue to incur, capital expenditures to enable larger scale production.
      To date, we have spent over $9 million in capital expenditures building the
      current manufacturing suite.





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. We believe that multi-sourcing is possible
      provided we can demonstrate that the manufacturing process is the same at
      all suppliers and the product produced by them is equivalent.





Key
        raw 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. We estimate, in part, based on the number of pigs
        killed worldwide and estimates of projected supplies of porcine
        mucosa, that there is enough potential supply of this raw
        material to commercialize Sulonex. If our estimates of the
        potential supply of this key raw material are not accurate or we cannot secure
        adequate amounts of the potential supply of such material, then the market
        potential of Sulonex will not be realized. 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
      established contract manufacturing relationships for the supply of Zerenex
      to
      ensure that we will have sufficient material for clinical trials. In addition,
      we are establishing the basis for commercial production capabilities. As with
      any supply program, obtaining raw materials of the correct quality cannot be
      guaranteed and we cannot ensure that we will be successful in this
      endeavor.





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


18





At
      the
      time of commercial sale, to the extent possible and commercially practicable,
      we
      would seek 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
      number 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 their 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 .
      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.





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.


19





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.




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 Phase IV post-marketing studies to find out more
                about
                the drug’s long-term risks, benefits, and optimal use, or to test the drug
                in different populations.




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;




20




·
            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.





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 foreign 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. Typically, if the regulatory authority is satisfied that
      a
      company has presented adequate evidence of safety, quality and efficacy, then
      the regulatory authority will grant a marketing authorization. This foreign
      regulatory approval process, however, involves risks similar or identical to
      the
      risks associated with FDA approval discussed above, and therefore we cannot
      guarantee that we will be able to obtain the appropriate marketing authorization
      for any product in any particular country.


21





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 $9,805,000 in 2004,
      $24,182,000 in 2005, and $56,139,000 in 2006. “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
      March 1, 2007, we had 40 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.


22


**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, 2006, we had an accumulated deficit of
      approximately $188.2 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.





We
      have
      not yet commercialized any of our drug candidates and cannot be sure we will
      ever be able to do so. Even if we commercialize one or more of our drug
      candidates, 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.





**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. In addition, conducting
      multi-national studies adds another level of complexity and risk as we are
      subject to events affecting countries outside the United States.





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 a new drug application,
      or 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.




23





***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.





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 Sulonex Phase III study will track the data from the pilot
      CSG
      Phase II study or the DiNAS Phase II study, or that the results from the Sulonex
      Phase IV study will yield sufficient efficacy data. Results from these earlier
      Sulonex studies 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. Interpretation of the prior
      safety data of Sulonex, or our other drug candidates, may also be flawed and
      there can be no assurance that safety concerns from the prior data were
      overlooked or misinterpreted, which in subsequent, larger studies appear and
      prevents approval of Sulonex or our other drugs candidates.





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 rights, patent or
      otherwise, to our drugs candidates from third parties. 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.
      From time to time, in the ordinary course of business, we may have disagreements
      with our licensors or collaborators regarding the terms of our agreements or
      ownership of proprietary rights, which could lead to delays in the research,
      development and commercialization of our drug candidates or could require or
      result in litigation or arbitration, which would be time-consuming and
      expensive.





***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
      limited experience in manufacturing products for clinical or commercial
      purposes. 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.


24





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.





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.
      In addition, we have entered into an agreement with the same manufacturer to
      build a larger scale manufacturing suite within their current facility, which
      they will operate on our behalf. We believe this suite will be suitable to
      manufacture launch and initial commercialization (approximately one to three
      years) quantities of Sulonex. As we move forward, we plan to build additional
      manufacturing capacity to meet the future demands for Sulonex. As with all
      heparin-like compounds, the end product is highly sensitive to the manufacturing
      process utilized. Accordingly, as we scale-up we will need to accurately
      reproduce the established process on the larger scale to ensure successful
      commercialization of Sulonex. There can be no assurance that we will be
      successful in this endeavor. Additionally, as we scale-up, we have incurred,
      and
      will continue to incur, capital expenditures to enable larger scale production.
      Through December 31, 2006, we have spent over $8 million in capital expenditures
      building the current manufacturing suite.





***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.***





Key
        raw 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. We estimate, in part, based on the number of pigs
        killed worldwide and estimates of projected supplies of porcine
        mucosa, that there is enough potential supply of this raw
        material to commercialize Sulonex. If our estimates of the
        potential supply of this key raw material are not accurate or we cannot secure
        adequate amounts of the potential supply of such material, then the market
        potential of Sulonex will not be realized. 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. 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.


25





**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.





***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.


26





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.





***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
      March 1, 2007, we had 40 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. 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. In
      particular, we are currently projecting that the price of Sulonex will be at
      a
      significant premium to the currently marketed products that are approved for
      the
      treatment of diabetic nephropathy. The inability to obtain adequate
      reimbursement for Sulonex would limit our ability to generate revenue and
      prevent us from realizing the market potential of
      Sulonex.


27





***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 proposals relating to the reimportation of drugs into the U.S.
      from other countries (where they are then 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.





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





The
      use
      of our drug candidates in clinical trials, the future sale of any approved
      drug
      candidates and new technologies, and the sale of Accumin, 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 and the sale of Accumin. 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 also 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
      40
      full and part-time 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 believe that our corporate compliance program is sufficient
      to ensure compliance with applicable regulations, 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.


28





**Risks
      Related to Our Financial Condition**





***Our
      current cash, cash equivalents and investment securities may not be adequate
      to
      support our operations for approximately the next 18 to 24 months as we have
      estimated.***





We
      believe that our $125.6 million in cash, cash equivalents, interest receivable
      and investment securities as of December 31, 2006 will be sufficient to enable
      us to meet our planned operating needs and capital expenditures for
      approximately the next 18 to 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:





·
            the
                timing of completion and results from clinical trials for our drug
                candidates, especially Sulonex;





·
            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, cash equivalents,
      interest receivable and investment securities will be sufficient to fund our
      operating expenses and capital requirements for approximately the next 18 to
      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
                timing of completion and results from clinical trials for our drug
                candidates, especially Sulonex;





·
            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.


29





***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 New
      Israeli Shekels, or approximately $1,032,000, 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 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. At this time, the Circuit Court of
      Jerusalem has not issued a decision with respect to the motion to
      dismiss. A hearing on a motion by Keryx Biopharmaceuticals, Inc. to vacate
      service of process outside of Israel was held in June 2006. In October 2006,
      the
      Circuit Court of Jerusalem held that the service of process on Keryx was valid.
      We appealed this determination and the appeal is currently pending. 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.





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.





***We
      are party to a motion filed by AusAm Biotechnologies, Inc. in Bankruptcy Court
      that may result in us making an additional payment to AusAm Biotechnologies,
      Inc.***





We
      acquired the assets of the diagnostics business of AusAm Biotechnologies, Inc.,
      a debtor in a pending Chapter 11 bankruptcy proceedings, in a court-approved
      transaction.  Subsequent to the closing, disputes arose between the debtor
      and Keryx relating to the determination of the purchase consideration under
      the
      acquisition agreement. On July 31, 2006, the debtor filed a motion
      purporting to seek to enforce the terms of the acquisition agreement and
      alleging damages in the amount of $818,145. The parties have agreed to a
      settlement in principle of the matter, subject to documentation and Bankruptcy
      Court approval, pursuant to which Keryx will pay AusAm approximately
      $110,000.





**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.


30





***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 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 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**





***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. Following our registered direct offering of common stock to two
      institutional investors that was completed in March 2006, there remains
      approximately $67 million available for sale on this shelf registration
      statement. 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, our stockholders 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.





***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.


31





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.





***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 6,000 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 New Israeli Shekels, or
      approximately $1,032,000, 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 filed a motion
      to dismiss the complaint. The plaintiff has filed a response to each answer.
      At
      this time, the Circuit Court of Jerusalem has not issued a decision with respect
      to the motion to dismiss.  A hearing on a motion by Keryx
      Biopharmaceuticals, Inc. and Michael S. Weiss to vacate service of process
      outside of Israel was held in June 2006. In October 2006, the Circuit Court
      of
      Jerusalem held that the service of process on Keryx Biopharmaceuticals, Inc.
      was
      valid. We appealed this determination and the appeal is currently
      pending. The Circuit Court of Jerusalem held that the service of process on
      Michael S. Weiss was invalid. Consequently, the Circuit Court of Jerusalem
      dismissed the suit against Mr. Weiss. 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.


32





In
      April
      2006, we acquired the assets of the diagnostics business of AusAm
      Biotechnologies, Inc., a debtor in a pending Chapter 11 proceeding, in a
      court-approved transaction.  Subsequent to the closing, disputes arose
      between the debtor and Keryx relating to the determination of the purchase
      consideration under the acquisition agreement. On July 31, 2006, the debtor
      filed a motion purporting to seek to enforce the terms of the acquisition
      agreement and alleging damages in the amount of $818,145. (In re:  AusAm
      Biotechnologies, Inc., Chapter 11 Case No. 06-10214 (RDD) (Bankr.
      S.D.N.Y.)). Keryx opposed the motion and asserted a counterclaim alleging
      fraud in connection with the acquisition. The parties have agreed to a
      settlement in principle of the matter, subject to documentation and Bankruptcy
      Court approval, pursuant to which Keryx will pay AusAm approximately
      $110,000.





**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
      2006.





**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 Global 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.





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, 2006**
            
            **High**
            
            **Low**Fourth
                Quarter
            
            $
            14.77
            
            $
            11.96Third
                Quarter
            
            $
            14.84
            
            $
            9.60Second
                Quarter
            
            $
            18.19
            
            $
            12.54First
                Quarter
            
            $
            19.16
            
            $
            14.95





**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





***Holders***





The
      number of record holders of our common stock as of March 8, 2007 was 37.





***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.


33




***Securities
        Authorized for Issuance Under Equity Compensation
        Plans***
 
 The
        following table provides information as of December 31, 2006, 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, the 2004 Long-Term Incentive Plan, and the
        2006
        CFO Incentive Plan.




**Equity
                Compensation Plan
                Information****Plan
                Category**
            
            **Number
                of securities to be issued upon exercise of outstanding
                options**
            
            **Weighted-average
                exercise price of outstanding options**
            
            **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
            
            
            7,187,056
            
            $
            9.09
            
            
            152,158Equity
                compensation plans not approved by security holders
            
            
            3,562,657
            
            $
            5.48
            
            
            —Total
            
            
            10,749,713
            
            $
            7.90
            
            
            152,158





For
      information about all of our equity compensation plans, see Note 7 to our Consolidated
      Financial Statements included
      in this report .


34


**COMMON
      STOCK PERFORMANCE GRAPH**





The
      following graph compares the cumulative total stockholder return on our common
      stock for the period from December 31, 2001 through December 31, 2006, with
      the
      cumulative total return over such period on (i) the United States Index of
      the
      Nasdaq Stock Market and (ii) the Biotechnology Index of the Nasdaq Stock Market.
      The graph assumes an investment of $100 on December 31, 2001, in our common
      stock (at the closing market price) and in each of the indices listed above,
      and
      assumes the reinvestment of all dividends. Measurement points are December
      31 of
      each year.




35
  **ITEM
        6. SELECTED FINANCIAL DATA.**
 
 The
        following Statement of Operations Data for the years ended December 31, 2006,
        2005, 2004, 2003 and 2002, and Balance Sheet Data as of December 31, 2006,
        2005,
        2004, 2003 and 2002, 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.”





**Years
                ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**(in
                thousands, except per share data)**Statement
                of Operations Data:**Diagnostic
                revenue
            
            $
            103
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Service
                revenue
            
            
            431
            
            
            574
            
            
            809
            
            
            —
            
            
            —**Total
                revenue**
            
            
            534
            
            
            574
            
            
            809
            
            
            —
            
            
            —**Operating
                expenses:**Cost
                of diagnostics sold
            
            
            140
            
            
            —
            
            
            —
            
            
            —
            
            
            —Cost
                of services
            
            
            390
            
            
            819
            
            
            835
            
            
            —
            
            
            —Research
                and development:Non-cash
                compensation
            
            
            6,504
            
            
            594
            
            
            413
            
            
            (486
            )
            
            (1,382
            )Non-cash
                acquired in-process research
              and
                development
            
            
            —
            
            
            —
            
            
            18,800
            
            
            —
            
            
            —Other
                research and development
            
            
            56,139
            
            
            24,182
            
            
            9,805
            
            
            5,996
            
            
            9,523Total
                research and development
            
            
            62,643
            
            
            24,776
            
            
            29,018
            
            
            5,510
            
            
            8,141Selling,
                general and administrative:Non-cash
                compensation
            
            
            8,408
            
            
            775
            
            
            1,087
            
            
            188
            
            
            (4
            )Other
                selling, general and administrative
            
            
            9,110
            
            
            3,416
            
            
            3,581
            
            
            3,684
            
            
            4,108Total
                selling, general and administrative
            
            
            17,518
            
            
            4,191
            
            
            4,668
            
            
            3,872
            
            
            4,104**Total
                operating expenses**
            
            
            80,691
            
            
            29,786
            
            
            34,521
            
            
            9,382
            
            
            12,245**Operating
                loss**
            
            
            (80,157
            )
            
            (29,212
            )
            
            (33,712
            )
            
            (9,382
            )
            
            (12,245
            )**Other
                income (expense):**Interest
                and other income, net
            
            
            6,393
            
            
            2,317
            
            
            770
            
            
            247
            
            
            513Income
                taxes
            
            
            —
            
            
            —
            
            
            (1
            )
            
            27
            
            
            (51
            )**Net
                loss**
            
            $
            (73,764
            )
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (9,108
            )
            $
            (11,783
            )**Net
                loss per common share**Basic
                and diluted
            
            $
            (1.76
            )
            $
            (0.78
            )
            $
            (1.10
            )
            $
            (0.43
            )
            $
            (0.59
            )




**As
                of December
                31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**(in
                thousands)**Balance
                Sheet Data:**Cash,
                cash equivalents, interest receivable
              and
                investment securities
            
            $
            125,610
            
            $
            100,733
            
            $
            49,878
            
            $
            31,414
            
            $
            24,131Working
                capital
            
            
            102,774
            
            
            83,890
            
            
            46,538
            
            
            30,982
            
            
            22,350Total
                assets
            
            
            140,313
            
            
            105,097
            
            
            50,862
            
            
            32,223
            
            
            29,103Other
                liabilities
            
            
            294
            
            
            322
            
            
            92
            
            
            —
            
            
            256Contingent
                equity rights
            
            
            4,004
            
            
            4,004
            
            
            4,004
            
            
            —
            
            
            —Total
                stockholders’ equity
            
            
            123,821
            
            
            94,678
            
            
            42,804
            
            
            31,226
            
            
            26,330


36


**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 beginning on page F-1 of this
      report.





**Overview**





We
      are a
      biopharmaceutical company focused on the acquisition, development and
      commercialization of medically important, 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
      an SPA with the 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 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 drug 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
      identification, 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
      service 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.





Our
      diagnostic revenue is based on the sale of a diagnostic product for the direct
      measurement of total, intact urinary albumin. Diagnostic revenue is recognized
      when persuasive evidence of an arrangement exists, the product has been shipped,
      title and risk of loss have passed to the customer and collection from the
      customer is reasonably assured.





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 other support facilities
      associated with delivering services to our clients. Cost of services are
      recognized as services are performed.





Our
      cost
      of diagnostics sold consist specifically of costs associated with the
      manufacture of the diagnostic products such as payments to third-party vendors,
      material costs and other support facilities associated with delivering of the
      diagnostics to our customers. Cost of diagnostics sold are recognized as
      diagnostic revenue is recognized.


37




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 drug
      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, 2006, 2005 and 2004 were $56,139,000, $24,182,000,
      and
      $9,805,000, respectively.





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




**Years
                ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **Amounts
                accumulated during the**
              **development
                stage**Sulonex
            
            $
            41,533,000
            
            $
            16,075,000
            
            $
            6,064,000
            
            $
            71,812,000KRX-0401
            
            
            8,508,000
            
            
            5,394,000
            
            
            2,230,000
            
            
            16,132,000Other
                clinical stage compounds
            
            
            3,941,000
            
            
            1,593,000
            
            
            623,000
            
            
            6,157,000Other
            
            
            2,157,000
            
            
            1,120,000
            
            
            888,000
            
            
            25,932,000Total
            
            $
            56,139,000
            
            $
            24,182,000
            
            $
            9,805,000
            
            $
            120,033,000





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 awards of options
      granted to employees and directors represents the fair value of the award
      recorded over the respective vesting periods of the individual stock options.
      The expense is included in the respective categories of expense in the
      statements of operations. For awards of options and warrants to consultants
      and
      other third-parties, compensation expense is determined at the “measurement
      date.” The expense is recognized over the vesting period of the award. Until the
      measurement date is reached, the total amount of compensation expense remains
      uncertain. We record compensation expense based on the fair value of the award
      at the reporting date. These awards are then revalued, or the total compensation
      is recalculated based on the then current fair value, at each subsequent
      reporting date. We expect to continue to incur significant non-cash compensation
      as a result of Statement of Financial Accounting Standards (“SFAS”) No. 123R,
“Share-Based Payment” (“SFAS No. 123R”), which we adopted on January 1, 2006. In
      addition, 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.





For
      periods presented prior to our adoption of SFAS No. 123R, 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 considered 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
      was recorded over the respective vesting periods of the individual stock options
      and warrants. The expense was included in the respective categories of expense
      in the statement of operations.





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
      drug
      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.


38




**RESULTS
      OF OPERATIONS**





**Years
      Ended December 31, 2006 and 2005**





*Diagnostic
      Revenue.* Diagnostic revenue for
      the
      year ended December 31, 2006 was $103,000 as compared to no diagnostic revenue
      for the year ended December 31, 2005. Diagnostic revenue for the year ended
      December 31, 2006 was a result of our acquisition of Accumin during the second
      quarter of 2006. We
      do not
      expect our diagnostic revenue to have a material impact on our financial results during
      the next fiscal year.





*Service
      Revenue.* Service
      revenue decreased by $143,000 to $431,000 for the year ended December 31, 2006,
      as compared to service revenue of $574,000 for the year ended December 31,
      2005.
      The decrease in service revenue was primarily due to the timing of services
      performed in accordance with our service contracts. We do not expect our service
      revenue to have a material impact on our financial results during the next
      fiscal year.





*Cost
      of Diagnostics Sold Expense* .
      Cost of
      diagnostics sold expense for the year ended December 31, 2006 was $140,000
      as
      compared to no cost of diagnostics sold expense for the year ended December
      31,
      2005. Cost
      of
      diagnostics sold expense for the year ended December 31, 2006 was a result
      of
      our acquisition of Accumin during the second quarter of 2006. We
      do not
      expect our cost of diagnostics sold expense to have a material impact on our
      financial results during the next fiscal year.





*Cost
      of Services Expense* .
      Cost of
      services expense decreased by $429,000 to $390,000 for the year ended December
      31, 2006, as compared to an expense of $819,000 for the year ended December
      31,
      2005. The decrease in cost of services was primarily due to a reduction in
      the
      amount of time necessary to service client contracts, as well as the timing
      of
      services performed in accordance with our service contracts. We do not expect
      our cost of service expense 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 was $6,504,000 for the
      year
      ended December 31, 2006, as compared to an expense of $594,000 for the year
      ended December 31, 2005. The increase in non-cash compensation expense was
      due
      primarily to a $5,963,000 increase in expense related to the adoption of SFAS
      No. 123R on January 1, 2006. For the years ended December 31, 2006, and 2005,
      expenses of $502,000 and $464,000, respectively, were due to the adjustment
      to
      fair market value under EITF
      96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees
      for Acquiring, or in Conjunction with Selling, Goods or Services,” or EITF
      96-18, of
      previously-issued options to consultants.





*Other
      Research and Development Expenses* .
      Other
      research and development expenses increased by $31,957,000 to $56,139,000 for
      the year ended December 31, 2006, as compared to an expense of $24,182,000
      for
      the year ended December 31, 2005. The increase in other research and development
      expenses was due primarily to a $25,458,000 increase in expenses related to
      our
      Sulonex pivotal
      Phase III and Phase IV clinical program ,
      which
      includes one-half, or $1,000,000, of a one-time bonus to our Chief Executive
      Officer pursuant to his employment agreement for the achievement of a corporate
      milestone, and
      a
      $5,462,000 increase in expenses related to our other clinical compounds,
      including a $500,000 milestone expense relating to Zerenex and a $600,000
      expense relating to the in-licensing of KRX-0601.





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, as well as possible
      development programs for our other drug candidates.





*Non-Cash
      Compensation Expense (Selling, General and Administrative).* Non-cash
      compensation expense related to stock option and restricted stock grants was
      $8,408,000 for the year ended December 31, 2006, as compared to an expense
      of
      $775,000 for the year ended December 31, 2005. The increase in non-compensation
      expense was due primarily to a $5,704,000 increase in expense related to the
      adoption of SFAS No. 123R on January 1, 2006. In addition, modifications made
      by
      the Board of Directors of the vesting and exercisability of certain grants
      during the second and third quarters resulted in additional expense of
      $1,803,000 for the year ended December 31, 2006. For the years ended December
      31, 2006, and 2005, expenses of $475,000 and $306,000, respectively, were due
      to
      the adjustment to fair market value under EITF
      96-18 of
      previously-issued options to consultants. Expenses during the year ended
      December 31, 2006 of $189,000 were due to the issuance of restricted stock.





*Other
      Selling, General and Administrative Expenses* .
      Other
      selling, general and administrative expenses increased by $5,694,000 to
      $9,110,000 for the year ended December 31, 2006, as compared to an expense
      of
      $3,416,000 for the year ended December 31, 2005. The increase in selling,
      general and administrative expenses was due primarily to an increase of
      $1,746,000 in legal expenses associated with business development, option
      review, and patents costs, as well as, one-half, or $1,000,000, 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 selling, general and administrative expenses to reflect
      the
      allocation of his responsibilities and activities for Keryx. The increase was
      also due to $470,000 of expenses incurred in the first quarter of 2006 related
      to the acquisition of Accumin, $410,000 of sales and marketing expenses
      associated with Accumin and $400,000 of financial analyses
      expenses.


39





We
      expect
      our other selling, general and administrative costs to increase over the next
      year as we scale-up our operations and infrastructure to prepare to
      commercialize our drug candidates.





*Interest
      and Other Income, Net* .
      Interest and other income, net, increased by $4,076,000 to $6,393,000 for the
      year ended December 31, 2006, as compared to income of $2,317,000 for the year
      ended December 31, 2005. The increase resulted from a higher level of invested
      funds due to the completion of the registered direct offering that closed in
      March 2006, 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 years ended December 31, 2006, and
      2005.





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





*Diagnostic
      Revenue.* There
      was no diagnostic revenue for
      the
      years ended December 31, 2005, and 2004.





*Service
      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.





*Cost
      of Diagnostics Sold Expense* .
      There
      was no cost of diagnostics for
      the
      years ended December 31, 2005, and 2004.





*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.





*Non-Cash
      Compensation Expense (Research and Development).*  Non-cash
      compensation expense related to stock option grants 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 under EITF
      96-18 of
      previously-issued options to consultants accounted for expenses of $464,000
      and
      $276,000, respectively, and 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.





*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, we 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.





*Non-Cash
      Compensation Expense (Selling, General and Administrative).*  Non-cash
      compensation expense related to stock option grants 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 under EITF
      96-18 of
      previously-issued options to consultants accounted for expenses of $306,000
      and
      $175,000, respectively, and 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.


40





*Other
      Selling, General and Administrative Expenses* . Other
      selling, 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 selling, 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 $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.





**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.





As
      of
      December 31, 2006, we had $125.6 million in cash, cash equivalents, interest
      receivable, and short-term and long-term securities, an increase of $24.9
      million from December 31, 2005. Cash used in operating activities for the year
      ended December 31, 2006 was $52.2 million, as compared to $25.8 million for
      the
      year ended December 31, 2005. 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 the expansion of our other clinical
      programs. For the year ended December 31, 2006, net cash used in investing
      activities of $51.9 million was primarily the result of the investment of a
      portion of the proceeds of our registered direct offering that closed in March
      2006 in marketable securities, as well as $7.6 million of manufacturing capital
      expenditures relating to the scale-up for larger scale production of Sulonex.
      For the year ended December 31, 2006, net cash provided by financing activities
      of $84.7 million was the result of our $82.7 million registered direct offering
      of our common stock completed in March 2006, and $2.0 million of proceeds from
      the exercise of options.





In
      March
      2006, we completed a registered direct offering of 4,500,000 shares of our
      common stock to two institutional investors at $18.40 per share. We received
      approximately $82.7 million in proceeds, net of offering expenses of
      approximately $104,000.





We
      believe that our $125.6 million in cash, cash equivalents, interest receivable
      and investment securities as of December 31, 2006 will be sufficient to enable
      us to meet our planned operating needs and capital expenditures for
      approximately the next 18 to 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.





Our
      cash
      and cash equivalents and investment securities as of December 31, 2006 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, 2006, 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 2007 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.
      Subsequent to the registered direct offering that was completed in March 2006,
      there remains approximately $67 million of our common stock available for sale
      on this shelf registration statement. 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 Keryx and our stockholders.
      We
      believe that the availability to conduct such offerings enhances our ability
      to
      raise additional capital to finance our operations.


41





**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      do not
      have any unconsolidated entities, and accordingly, 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, 2006, we have known contractual obligations, commitments and
      contingencies of $73,098,000. Of this amount, $70,530,000 relates to research
      and development agreements (primarily relating to our pivotal Phase III and
      Phase IV clinical program for Sulonex), of which $31,205,000 is due within
      the
      next year, with the remaining balance due as per the schedule below. The
      additional $2,568,000 relates to our operating lease obligations, of which
      $788,000 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
            
            $
            70,530,000
            
            $
            31,205,000
            
            $
            39,183,000
            
            $
            142,000
            
            $
            —Operating
                leases
            
            
            2,568,000
            
            
            788,000
            
            
            1,321,000
            
            
            459,000
            
            
            —Total
            
            $
            73,098,000
            
            $
            31,993,000
            
            $
            40,504,000
            
            $
            601,000
            
            $
            —





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 $77.4 million over the life of the licenses,
      of
      which approximately $58.8 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 (up to 3,372,422 shares of
      our
      common stock) if its drug candidates meet certain development milestones. We
      have also entered into a royalty arrangement under which our wholly-owned
      subsidiary may be required to pay up to a maximum of $16.1 million to AusAm
      on
      revenue from a next generation product following FDA marketing approval, as
      part
      of our acquisition of Accumin. The uncertainty relating to the timing of the
      commitments described in this paragraph prevents us from including them 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.





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:


42





*Stock
      Compensation* .
      We have
      granted options to employees, directors and consultants, as well as warrants
      to
      other third parties. In December 2004, the FASB issued SFAS No. 123R. SFAS
      No. 123R is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation”
and amends SFAS No. 95 “Statement of Cash Flows.” SFAS No. 123R supersedes
      APB Opinion No. 25 “Accounting for Stock Issued to Employees,” and its
      related implementation guidance. SFAS No. 123R covers a wide range of
      share-based compensation arrangements including stock options, restricted share
      plans, performance-based awards, share appreciation rights, and employee share
      purchase plans. We adopted SFAS No. 123R effective January 1, 2006. See
      Note 1 to our consolidated financial statements.





In
      applying SFAS No. 123R, the value of each option award is estimated on the
      date
      of grant using the Black-Scholes option-pricing model. 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, the closing market price of our stock
      and the exercise price. We base our estimates of our stock price volatility
      on
      the historical volatility of our common stock and our assessment of future
      volatility; 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.
      The
      estimates utilized in the Black-Scholes calculation involve inherent
      uncertainties and the application of management judgment. In addition, we are
      required to estimate the expected forfeiture rate and only recognize expense
      for
      those options expected to vest. As a result, if other assumptions had been
      used,
      our recorded stock-based compensation expense could have been materially
      different from that reported.





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.





*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
      Related to the Valuation of Intangible Assets.* In
      accounting for acquisitions, we allocate the purchase price to the fair value
      of
      the acquired tangible and intangible assets. This allocation requires us to
      make
      several significant judgments and estimates. For example, we estimated the
      value
      of the acquired intangible assets of Accumin utilizing the income approach,
      which requires us to make assumptions and estimates about, among other
      things: **





·
            revenue
                that is likely to result from the asset, including estimated selling
                price, estimated market share and year-over-year growth
                rates;





·
            operating
                margin; and





·
            sales
                and marketing and general and administrative expenses using historical
                and
                industry or other sources of market
                data;





The
      valuations are based on information that is available as of the acquisition
      date
      and the expectations and assumptions that have been 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 these
      reasons, among others, the actual results may vary from the projected results.





As
      of
      December 31, 2006, there was approximately $3.2 million of net goodwill and
      $0.6
      million of net other intangible assets on our consolidated balance sheet. We
      amortize our identifiable intangible assets over their estimated economic lives,
      which is 12 years, the life of the patents, using the straight-line method.


43





*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;





·
            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.





*Impairment.* SFAS No.
      144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS
      No. 144, requires that long-lived assets 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. Assets to be disposed of are reported at the lower of the carrying
      amount or fair value less costs to sell.


44





SFAS
      No.
      142, “Goodwill and Other Intangible Assets,” or SFAS No. 142, requires
      periodic tests of goodwill for impairment and that other intangible assets
      be
      amortized over their useful lives unless these lives are determined to be
      indefinite. SFAS No. 142 requires goodwill be tested using a two-step process.
      The first step compares the fair value of the reporting unit with the unit's
      carrying value, including goodwill. When the carrying value of the reporting
      unit is greater than fair value, the unit’s goodwill may be impaired, and the
      second step must be completed to measure the amount of the goodwill impairment
      charge, if any. In the second step, the implied fair value of the reporting
      unit’s goodwill is compared with the carrying amount of the unit’s goodwill. If
      the carrying amount is greater than the implied fair value, the carrying value
      of the goodwill must be written down to its implied fair value. We determine
      the
      implied fair value by discounting, to present value, the estimated future cash
      flow of the reporting unit, which includes various analyses, assumptions and
      estimates including discount rates, projected results and estimated cash flows.





We
      are
      required to perform impairment tests under SFAS No. 142 annually and whenever
      events or changes in circumstances suggest that the carrying value of an asset
      may not be recoverable. For all of our acquisitions, various analyses,
      assumptions and estimates were made at the time of each acquisition specifically
      regarding cash flows that were used to determine the valuation of goodwill
      and
      intangibles. When we perform impairment tests in future years, the possibility
      exists that changes in forecasts and estimates from those used at the
      acquisition date could result in impairment charges.





*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.





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**





In
      September 2006, the SEC staff issued Staff Accounting Bulletin Topic 1N,
“Financial Statements — Considering the Effects of Prior Year Misstatements
      when Quantifying Misstatements in Current Year Financial Statements,” or SAB
      108, which is effective for calendar-year companies as of December 31,
      2006. SAB 108 provides guidance on how prior year misstatements should be
      taken into consideration when quantifying misstatements in current year
      financial statements for purposes of determining whether the financial
      statements are materially misstated. SAB 108 requires that public companies
      utilize a “dual-approach” to assessing the quantitative effects of financial
      misstatements, whereby companies should take into account both the effect of
      a
      misstatement on the current year balance sheet as well as the impact upon the
      current year income statement in assessing the materiality of a current year
      misstatement. Once a current year misstatement has been quantified, the guidance
      in SAB Topic 1M, “Financial Statements — Materiality,” or
      SAB 99, should be applied to determine whether the misstatement is
      material. The adoption of SAB 108 did not have a material impact on our
      financial condition, results of operations or cash flows.





The
      FASB
      issued Statement of Financial Accounting Standards No. 157, “Fair Value
      Measurements,” or SFAS No. 157, in September 2006. The new standard provides
      guidance on the definition of and how to measure fair value and what sources
      of
      information are to be used in such measurements. It also prescribes expanded
      disclosures about fair value measurements contained in the financial statements.
      The pronouncement, including the new disclosures, is effective for us as of
      the
      first quarter of 2008. We are evaluating the
      potential impact of the new standard on our consolidated financial statements
      or
      results of operations; however, we do not expect the adoption of this standard
      will have a material effect on our consolidated financial
      statements.


45





**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, 2006, our
      portfolio of financial instruments consisted 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, 2006, was
      less than ten 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 and the notes thereto, included in Part IV,
      Item 15(a), part 1, are incorporated by reference into this Item 8.





**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.* As
      of
      December 31, 2006, management carried out, under the supervision and with the
      participation of our Chief Executive Officer and Chief Financial Officer, an
      evaluation of the effectiveness of the design and operation of our disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Exchange Act). Our disclosure controls and procedures are designed to provide
      reasonable assurance that information we are required to disclose in the reports
      that we file or submit under the Exchange Act is recorded, processed, summarized
      and reported within the time periods specified in applicable rules and forms.
      Based upon that evaluation, our Chief Executive Officer and Chief Financial
      Officer concluded that, as of December 31, 2006, our disclosure controls and
      procedures were effective.





*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, 2006. 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, 2006, 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 in this report.





*Changes
      in Internal Control Over Financial Reporting.* There
      were no changes in our internal controls over financial reporting during the
      quarter ended December 31, 2006, that have materially affected, or are
      reasonably likely to materially affect our internal control over financial
      reporting.





*Limitations
      on the Effectiveness of Controls.* Our
      management, including our Chief Executive Officer and Chief Financial 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.


46





**Part
      III**





**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**





The
      information required by this Item is incorporated herein by reference from
      our
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





**ITEM
      11. EXECUTIVE COMPENSATION**





The
      information required by this Item is incorporated herein by reference from
      our
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





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





The
      information required by this Item is incorporated herein by reference from
      our
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





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





The
      information required by this Item is incorporated herein by reference from
      our
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





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





The
      information required by this Item is incorporated herein by reference from
      our
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





47


**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, 2006 and 2005
            
            
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2006, 2005
                and
                2004, and the period from December 3, 1996 to December 31,
                2006
            
            
            F-4Consolidated
                Statements of Changes in Stockholders’ Equity for the years ended December
                31, 2006, 2005, and 2004, and the period from December 3, 1996 to
                December
                31, 2006
            
            
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2006, 2005
                and
                2004, and the period from December 3, 1996 to December 31,
                2006
            
            
            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 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.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.




48




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 March 31, 2004, filed on May 14, 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.




49




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,filed
                as Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for the
                year ended December 31, 2005, filed on March 8, 2006, and incorporated
                herein by reference.10.21!
            
            License
                Agreement between Keryx Biopharmaceuticals, Inc. and Panion & BF
                Biotech, Inc. dated as of November 7, 2005,filed
                as Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the
                year ended December 31, 2005, filed on March 8, 2005, and incorporated
                herein by reference.10.22*
            
            License
                Agreement by and between Kyowa Hakko Kogyo Co., Ltd. and Keryx
                Biopharmaceuticals, Inc. dated as of September 29, 2006,filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q
                for the quarter ended September 30, 2006, filed on November 8, 2006,
                and
                incorporated herein by reference.




50




10.23
            
            Assignment
                and Assumption Agreement (related to the License Agreement by and
                between
                Kyowa Hakko Kogyo Co., Ltd. and Keryx Biopharmaceuticals, Inc. dated
                as of
                September 29, 2006) by and among Keryx Biopharmaceuticals, Inc. and
                AOI
                Pharmaceuticals, Inc. dated as of October 25, 2006,filed
                as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
                quarter ended September 30, 2006, filed on November 8, 2006, and
                incorporated herein by reference.10.24†
            
            Amendment
                to the Keryx Biopharmaceuticals, Inc. 2004 Long-Term Incentive Plan
                dated
                April 11, 2006,filed
                as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
                quarter ended June 30, 2006, filed on August 9, 2006, and incorporated
                herein by reference.10.25†
            
            CFO
                Incentive Stock Option Agreement dated February 14, 2006.10.26†
            
            President
                Incentive Stock Option Agreement dated February 5, 2004.21.1
            
            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 16, 2007.31.2
            
            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 16, 2007.32.1
            
            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 16,
                2007.32.2
            
            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 16,
                2007.







!  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.




51




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


**Consolidated
      Financial Statements as of December 31, 2006**




Contents
            
            PageReports
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2006, 2005
                and
                2004, and the period from December 3, 1996 to December 31,
                2006
            
            F-4Consolidated
                Statements of Changes in Stockholders’ Equity for the years ended December
                31, 2006, 2005, and 2004, and the period from December 3, 1996 to
                December
                31, 2006
            
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2006, 2005
                and
                2004, and the period from December 3, 1996 to December 31,
                2006
            
            F-10Notes
                to the Consolidated Financial Statements
            
            F-12








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


**Consolidated
      Financial Statements as of December 31, 2006**




**Report
      of Independent Registered Public Accounting Firm**





The
      Board
      of Directors and Stockholders


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, 2006 and 2005, 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, 2006, and for the period
      from
      December 3, 1996 to December 31, 2006. 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, 2006
      and
      2005, and the results of their operations and their cash flows for each of
      the
      years in the three-year period ended December 31, 2006, and for the period
      from
      December 3, 1996 to December 31, 2006, in conformity with U.S. generally
      accepted accounting principles.





As
      discussed in the notes to the consolidated financial statements, effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      ("SFAS") No. 123R, "Share-Based Payment."





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, 2006, 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 14, 2007 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
      14,
      2007




F-1


**Report
      of Independent Registered Public Accounting Firm**





The
      Board
      of Directors and Stockholders


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, 2006, 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 generally accepted accounting principles. A company's internal control
      over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with 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 (3) 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, 2006, 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, 2006, based on criteria
      established in Internal Control—Integrated Framework issued by the 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, 2006 and 2005,
      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,
      2006, and for the period from December 3, 1996 to December 31, 2006, and our
      report dated March 14, 2007 expressed an unqualified opinion on those
      consolidated financial statements.





/s/  KPMG
      LLP





New
      York,
      New York


March
      14,
      2007




F-2





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


**Consolidated
      Balance Sheets as of December 31**





(in
      thousands, except share and per share amounts)





**2006**
            
            **2005****Assets**Current
                assetsCash
                and cash equivalents
            
            $
            48,736
            
            $
            68,175Short-term
                investment securities
            
            
            63,659
            
            
            18,272Accrued
                interest receivable
            
            
            525
            
            
            336Other
                receivables, inventory and prepaid expenses
            
            
            2,048
            
            
            3,200Total
                current assets
            
            
            114,968
            
            
            89,983Long-term
                investment securities
            
            
            12,690
            
            
            13,950Property,
                plant and equipment, net
            
            
            8,489
            
            
            1,004Goodwill
            
            
            3,208
            
            
            —Other
                assets (primarily intangible assets), net
            
            
            958
            
            
            160Total
                assets
            
            $
            140,313
            
            $
            105,097**Liabilities
                and stockholders’ equity**Current
                liabilitiesAccounts
                payable and accrued expenses
            
            $
            10,460
            
            $
            5,054Accrued
                compensation and related liabilities
            
            
            1,534
            
            
            936Deferred
                revenue
            
            
            200
            
            
            103Total
                current liabilities
            
            
            12,194
            
            
            6,093Contingent
                equity rights
            
            
            4,004
            
            
            4,004Other
                liabilities
            
            
            294
            
            
            322Total
                liabilities
            
            
            16,492
            
            
            10,419Stockholders’
                equityCommon
                stock, $0.001 par value per share (60,000,000 and 60,000,000 shares
                authorized,
              43,516,669
                and 37,831,896 shares issued, 43,460,569 and 37,775,796 shares
                outstanding
              at
                December 31, 2006, and 2005, respectively)
            
            
            44
            
            
            38Additional
                paid-in capital
            
            
            312,078
            
            
            209,177Treasury
                stock, at cost, 56,100 shares at December 31, 2006, and 2005,
                respectively
            
            
            (89
            )
            
            (89
            )Deficit
                accumulated during the development stage
            
            
            (188,212
            )
            
            (114,448
            )Total
                stockholders’ equity
            
            
            123,821
            
            
            94,678Total
                liabilities and stockholders’ equity
            
            $
            140,313
            
            $
            105,097





*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)





**2006**
            
            **2005**
            
            **2004**
            
            **Amounts
                accumulated during the********development****stage**Revenue:Diagnostic
                revenue
            
            $
            103
            
            $
            —
            
            $
            —
            
            $
            103Service
                revenue
            
            
            431
            
            
            574
            
            
            809
            
            
            1,814Management
                fees from related party
            
            
            —
            
            
            —
            
            
            —
            
            
            300Total
                revenue
            
            
            534
            
            
            574
            
            
            809
            
            
            2,217Operating
                expenses:Cost
                of diagnostics sold
            
            
            140
            
            
            —
            
            
            —
            
            
            140Cost
                of services
            
            
            390
            
            
            819
            
            
            835
            
            
            2,044Research
                and development:Non-cash
                compensation
            
            
            6,504
            
            
            594
            
            
            413
            
            
            14,238Non-cash
                acquired in-process research and development
            
            
            —
            
            
            —
            
            
            18,800
            
            
            18,800Other
                research and development
            
            
            56,139
            
            
            24,182
            
            
            9,805
            
            
            120,033Total
                research and development
            
            
            62,643
            
            
            24,776
            
            
            29,018
            
            
            153,071Selling,
                general and administrative:Non-cash
                compensation
            
            
            8,408
            
            
            775
            
            
            1,087
            
            
            13,849Other
                selling, general and administrative
            
            
            9,110
            
            
            3,416
            
            
            3,581
            
            
            34,196Total
                selling, general and administrative
            
            
            17,518
            
            
            4,191
            
            
            4,668
            
            
            48,045Total
                operating expenses
            
            
            80,691
            
            
            29,786
            
            
            34,521
            
            
            203,300Operating
                loss
            
            
            (80,157
            )
            
            (29,212
            )
            
            (33,712
            )
            
            (201,083
            )Interest
                and other income, net
            
            
            6,393
            
            
            2,317
            
            
            770
            
            
            13,362Net
                loss before income taxes
            
            
            (73,764
            )
            
            (26,895
            )
            
            (32,942
            )
            
            (187,721
            )Income
                taxes
            
            
            —
            
            
            —
            
            
            1
            
            
            491Net
                loss
            
            $
            (73,764
            )
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (188,212
            )Basic
                and diluted loss per common share
            
            $
            (1.76
            )
            $
            (0.78
            )
            $
            (1.10
            )
            $
            (9.21
            )Weighted
                average shares used in computing basic and diluted net loss per common
                share
            
            
            41,919,741
            
            
            34,384,576
            
            
            30,053,647
            
            
            20,440,585





*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, 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-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, 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-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, 2005
            
            
            —
            
            $
            —
            
            
            37,831,896
            
            $
            38
            
            $
            210,758Changes
                during the year:Issuance
                of common stock in public offering (net of issuance expenses of
                $104)
            
            
            —
            
            
            —
            
            
            4,500,000
            
            
            5
            
            
            82,692Issuance
                of common stock in connection with acquisition
            
            
            —
            
            
            —
            
            
            245,024
            
            
            —
            *
            
            3,310Issuance
                of common stock held in escrow
            
            
            —
            
            
            —
            
            
            15,646
            
            
            —
            *
            
            —Issuance
                of restricted stock
            
            
            —
            
            
            —
            
            
            100,000
            
            
            —
            *
            
            —Exercise
                of options
            
            
            —
            
            
            —
            
            
            824,103
            
            
            1
            
            
            1,987Reclassification
                of unearned compensation upon adoption of SFAS No. 123R
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,581
            )Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            14,912Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Balance
                at December 31, 2006
            
            
            —
            
            $
            —
            
            
            43,516,669
            
            $
            44
            
            $
            312,078




**Treasury
                stock**
            
            **Unearned**
            
            **Deficit
                accumulated during the development****Shares**
            
            **Amount**
            
            **compensation**
            
            **stage**
            
            **Total**Balance
                at December 31, 2005
            
            
            56,100
            
            $
            (89
            )
            $
            (1,581
            )
            $
            (114,448
            )
            $
            94,678Changes
                during the year:Issuance
                of common stock in public offering (net of issuance expenses of
                $104)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            82,697Issuance
                of common stock in connection with acquisition
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,310Issuance
                of common stock held in escrow
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —*Issuance
                of restricted stock
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —*Exercise
                of options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,988Reclassification
                of unearned compensation upon adoption of SFAS No. 123R
            
            
            —
            
            
            —
            
            
            1,581
            
            
            —
            
            
            —Compensation
                in respect of options and warrants granted to employees, directors
                and
                third-parties
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            14,912Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (73,764
            )
            
            (73,764
            )Balance
                at December 31, 2006
            
            
            56,100
            
            $
            (89
            )
            $
            —
            
            $
            (188,212
            )
            $
            123,821





*
      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,
                  2006):**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
                  $5,523)
              
              
              —
              
              
              —
              
              
              10,280,000
              
              
              11
              
              
              158,476Issuance
                  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
              
              
              —
              
              
              —
              
              
              868,169
              
              
              1
              
              
              9,634Issuance
                  of common stock held in escrow
              
              
              —
              
              
              —
              
              
              15,646
              
              
              —
              *
              
              —Issuance
                  of restricted stock
              
              
              —
              
              
              —
              
              
              100,000
              
              
              —
              *
              
              —Receipt
                  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
              
              
              —
              
              
              —
              
              
              5,297,786
              
              
              5
              
              
              5,793Reclassification
                  of unearned compensation upon adoption of SFAS No. 123R
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,581
              )Compensation
                  in respect of options and warrants granted to employees, directors
                  and
                  third-parties
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              29,078Warrants
                  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, 2006
              
              
              —
              
              $
              —
              
              
              43,516,669
              
              $
              44
              
              $
              312,078





*
      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,
                  2006):**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
                  $5,523)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              158,487Issuance
                  of common stock in private placement (net of issuance expenses
                  of
                  $1,205)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              45,795Issuance
                  of common stock in connection with acquisition
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              9,635Issuance
                  of common stock held in escrow
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              *Issuance
                  of restricted stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              *Receipt
                  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
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              5,798Reclassification
                  of unearned compensation upon adoption of SFAS No. 123R
              
              
              —
              
              
              —
              
              
              1,581
              
              
              —
              
              
              —Compensation
                  in respect of options and warrants granted to employees, directors
                  and
                  third-parties
              
              
              —
              
              
              —
              
              
              (1,581
              )
              
              —
              
              
              27,497Warrants
                  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
              
              
              —
              
              
              —
              
              
              —
              
              
              (188,212
              )
              
              (188,212
              )Balance
                  at December 31, 2006
              
              
              56,100
              
              $
              (89
              )
              $
              —
              
              $
              (188,212
              )
              $
              123,821




*
      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)





**2006**
            
            **2005**
            
            **2004**
            
            **Amounts**
              **accumulated**
              **during
                the**
              **development**
              **stage**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (73,764
            )
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (188,212
            )Adjustments
                to reconcile cash flows used in operating activities:Acquired
                in-process research and development
            
            
            —
            
            
            —
            
            
            18,800
            
            
            18,800Stock
                compensation expense
            
            
            14,912
            
            
            1,369
            
            
            1,500
            
            
            28,087Issuance
                of common stock to technology licensor
            
            
            —
            
            
            —
            
            
            —
            
            
            359Interest
                on convertible notes settled through issuance of preferred
                shares
            
            
            —
            
            
            —
            
            
            —
            
            
            253Depreciation
                and amortization
            
            
            224
            
            
            190
            
            
            155
            
            
            2,835Loss
                on disposal of property, plant and equipment
            
            
            —
            
            
            2
            
            
            —
            
            
            172Impairment
                charges
            
            
            —
            
            
            —
            
            
            —
            
            
            2,482Exchange
                rate differences
            
            
            —
            
            
            —
            
            
            (3
            )
            
            94Changes
                in assets and liabilities, net of effects of acquisitions:Decrease
                (increase) in other receivables, inventory and
              prepaid
                expenses
            
            
            1,253
            
            
            (2,578
            )
            
            (43
            )
            
            (1,576
            )(Increase)
                in accrued interest receivable
            
            
            (189
            )
            
            (192
            )
            
            (33
            )
            
            (525
            )(Increase)
                in security deposits
            
            
            (255
            )
            
            (8
            )
            
            —
            
            
            (263
            )Increase
                in accounts payable and accrued expenses
            
            
            4,974
            
            
            1,975
            
            
            874
            
            
            8,715Increase
                in accrued compensation and related liabilities
            
            
            575
            
            
            193
            
            
            68
            
            
            939(Decrease)
                increase in other liabilities
            
            
            (28
            )
            
            230
            
            
            (63
            )
            
            139Increase
                (decrease) in deferred revenue
            
            
            97
            
            
            (37
            )
            
            (316
            )
            
            (256
            )Net
                cash used in operating activities
            
            
            (52,201
            )
            
            (25,751
            )
            
            (12,004
            )
            
            (127,957
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of property, plant and equipment
            
            
            (7,597
            )
            
            (964
            )
            
            (24
            )
            
            (12,988
            )Proceeds
                from disposals of property, plant and equipment
            
            
            —
            
            
            1
            
            
            —
            
            
            425(Increase)
                in note and accrued interest receivable from related party
            
            
            —
            
            
            —
            
            
            (4
            )
            
            (356
            )Payments
                of transaction costs
            
            
            (231
            )
            
            —
            
            
            —
            
            
            (231
            )Decrease
                (increase) in other assets
            
            
            27
            
            
            (23
            )
            
            (8
            )
            
            (1,192
            )Investment
                in held-to-maturity short-term securities
            
            
            (4,080
            )
            
            (1,122
            )
            
            (16,838
            )
            
            (48,913
            )Proceeds
                from maturity of held-to-maturity short-term securities
            
            
            8,275
            
            
            15,045
            
            
            11,459
            
            
            52,021Investment
                in available-for-sale short-term securities
            
            
            (38,375
            )
            
            (13,700
            )
            
            (6,025
            )
            
            (58,100
            )Proceeds
                from sale of available-for-sale short-term securities
            
            
            6,725
            
            
            8,675
            
            
            1,000
            
            
            16,400Investment
                in held-to-maturity long-term securities
            
            
            (16,677
            )
            
            (21,270
            )
            
            —
            
            
            (37,947
            )Proceeds
                from maturity of held-to-maturity long-term securities
            
            
            5
            
            
            185
            
            
            —
            
            
            190Net
                cash used in investing activities
            
            
            (51,928
            )
            
            (13,173
            )
            
            (10,440
            )
            
            (90,691
            )





*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)





**2006**
            
            **2005**
            
            **2004**
            
            **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 subsequent public offerings, net
            
            
            82,697
            
            
            75,790
            
            
            —
            
            
            158,487Proceeds
                from private placements, net
            
            
            —
            
            
            —
            
            
            31,662
            
            
            45,795Proceeds
                from exercise of options and warrants
            
            
            1,988
            
            
            1,610
            
            
            5,034
            
            
            8,849Purchase
                of treasury stock
            
            
            —
            
            
            —
            
            
            —
            
            
            (89
            )Net
                cash provided by financing activities
            
            
            84,685
            
            
            77,400
            
            
            30,374
            
            
            267,379Cash
                acquired in acquisition
            
            
            5
            
            
            —
            
            
            94
            
            
            99Effect
                of exchange rate on cash
            
            
            —
            
            
            —
            
            
            3
            
            
            (94
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (19,439
            )
            
            38,476
            
            
            8,027
            
            
            48,736Cash
                and cash equivalents at beginning of year
            
            
            68,175
            
            
            29,699
            
            
            21,672
            
            
            —CASH
                AND CASH EQUIVALENTS AT END OF YEAR
            
            $
            48,736
            
            $
            68,175
            
            $
            29,699
            
            $
            48,736NON
                - CASH TRANSACTIONSIssuance
                of common stock in connection with acquisition
            
            $
            3,310
            
            $
            —
            
            $
            6,325
            
            $
            9,635Contingent
                equity rights in connection with acquisition
            
            
            —
            
            
            —
            
            
            4,004
            
            
            4,004Assumption
                of liabilities in connection with acquisition
            
            
            345
            
            
            —
            
            
            8,723
            
            
            9,068Conversion
                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
            
            $
            1,166Cash
                paid for income taxes
            
            $
            —
            
            $
            —
            
            $
            1
            
            $
            432




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
      medically important, 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, focusing on 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., Neryx
      Biopharmaceuticals, Inc., and Accumin Diagnostics, Inc., all 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. Most of the Company's biopharmaceutical development and
      substantially all of its administrative operations during 2006 and 2005 were
      conducted in the United States of America.





On
      February 5, 2004, the Company completed the acquisition of ACCESS Oncology,
      Inc.
      and its subsidiaries (“ACCESS Oncology”). 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. 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.





On
      April
      6, 2006, Accumin Diagnostics, Inc., a wholly-owned subsidiary of the Company,
      completed the acquisition of Accumin TM ,
      a
      novel, patent protected, diagnostic for the direct measurement of total,
      intact urinary albumin, from AusAm Biotechnologies, Inc. The transaction was
      accounted for under the purchase method of accounting. The assets and
      liabilities of Accumin that the Company acquired and assumed pursuant to the
      acquisition have been included in the Company’s consolidated financial
      statements as of April 6, 2006.





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.




F-12





**USE
      OF ESTIMATES**





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles (“GAAP”) 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.





**CASH
      AND CASH EQUIVALENTS**





The
      Company considers all highly liquid investments with maturities of three months
      or less from the date of purchase to be cash equivalents.





**INVESTMENT
      SECURITIES**





Investment
      securities at December 31, 2006 and 2005 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)Lab
                equipment
            
            4Office
                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 has
      incurred, and will continue to incur, manufacturing capital expenditures
      relating to the scale-up for larger scale production. Accordingly, the Company’s
      manufacturing suite and equipment costs is not
      yet in production and is not amortized or depreciated until it is ready for
      its
      intended use.





**PATENT
      COSTS**





The
      Company expenses patent maintenance costs as incurred. Through
      March 31, 2006, the Company classified its patent expenses in other research
      and
      development. Effective April 1, 2006, the Company has classified its patent
      expenses in other selling, general and administrative. The results of prior
      periods have not been reclassified because they were not significant.





**REVENUE
      RECOGNITION**





Diagnostic
      revenue consists
      of the sale of diagnostic products for the direct measurement of total, intact
      urinary albumin. Diagnostic revenue is recognized when persuasive evidence
      of an
      arrangement exists, the product has been shipped, title and risk of loss have
      passed to the customer and collection from the customer is reasonably assured. Service
      revenue consists 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 DIAGNOSTICS SOLD AND COST OF SERVICES**





Cost
      of
      diagnostics sold consist specifically of costs associated with the manufacture
      of the diagnostic products such as payments to third-party vendors and systems,
      material costs and other support facilities associated with delivering of the
      diagnostics to our customers. Cost of diagnostics sold is recognized as
      diagnostic revenue is recognized. 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
      December 2004, the Financial Accounting Standards Board
      (“FASB”) issued Statement of Financial Accounting Standards ("SFAS") No.
      123R, “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires all
      share-based payments to employees, or to non-employee directors as compensation
      for service on the Board of Directors, to be recognized as compensation expense
      in the consolidated financial statements based on the fair values of such
      payments.





The
      Company adopted SFAS No. 123R on January 1, 2006 using the modified prospective
      transition method. Under this method, compensation cost recognized for the
      year
      ended December 31, 2006 includes: a) compensation cost for all share-based
      payments granted prior to, but not yet vested as of January 1, 2006, based
      on the grant-date fair value estimated in accordance with the original
      provisions of Statement of Financial Accounting Standards No. 123
“Accounting for Stock-Based Compensation,” (“SFAS No. 123”), and b) compensation
      cost for all share-based payments granted subsequent to January 1, 2006,
      based on the grant-date fair value estimated in accordance with the provisions
      of SFAS No. 123R. The results for prior periods have not been restated.





Stock-based
      compensation expense recognized each period is based on the value of the portion
      of share-based payment awards that is ultimately expected to vest during the
      period. SFAS No. 123R requires forfeitures to be estimated at the time of grant
      and revised, if necessary, in subsequent periods if actual forfeitures differ
      from those estimates. In the Company’s pro forma disclosures required under SFAS
      No. 123 for periods prior to 2006, the Company accounted for forfeitures as
      they
      occurred. Upon adoption of SFAS No. 123R, the Company elected to use the
      Black-Scholes model to value share-based payments granted to employees
      subsequent to January 1, 2006 and elected to attribute the value of
      stock-based compensation expense using the straight-line single option method.
      These methods were previously used for the Company’s pro forma information
      required under SFAS No. 123. For additional information, see Note 7 -
      Stockholders' Equity.




F-14





The
      Company accounts for equity instruments issued to third party service providers
      (non-employees) in accordance with the fair value method prescribed by the
      provisions of Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity
      Instruments That Are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling Goods or Services” (“EITF 96-18”).





Prior
      to
      January 1, 2006, the Company applied 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 was recorded on the date of grant only
      if the current market price of the underlying stock exceeded the exercise price.
      SFAS No. 123 established accounting and disclosure requirements using
      a
      fair-value-based method of accounting for stock-based employee compensation
      plans. As permitted by SFAS No. 123, the Company elected to continue to apply
      the intrinsic-value-based method of APB 25 described above, and adopted only
      the
      disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting
      For Stock-Based Compensation - Transition and Disclosure.”





**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
      outstanding as of December 31, 2006, 2005 and 2004, which are not included
      in
      the computation of net loss per share amounts, were 11,071,689, 8,346,628 and
      8,193,174, respectively.





**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.





**IMPAIRMENT**





The
      Company accounts for impairment of long lived assets 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.




F-15





The
      Company accounts for impairment of goodwill using the provisions SFAS No. 142,
      “Goodwill and Other Intangible Assets” (“SFAS No. 142”). This statement requires
      periodic tests of goodwill for impairment. SFAS No. 142 requires goodwill be
      tested using a two-step process. The first step compares the fair value of
      the
      reporting unit with the unit's carrying value, including goodwill. When the
      carrying value of the reporting unit is greater than fair value, the unit’s
      goodwill may be impaired, and the second step must be completed to measure
      the
      amount of the goodwill impairment charge, if any. In the second step, the
      implied fair value of the reporting unit’s goodwill is compared with the
      carrying amount of the unit’s goodwill. If the carrying amount is greater than
      the implied fair value, the carrying value of the goodwill must be written
      down
      to its implied fair value. As of December 31, 2006, management concluded that
      there is no impairment to its goodwill.





**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 and
      short-term and long-term investments with multiple financial institutions and
      invests in investment-grade securities with average maturities of less than
      twenty-four months.





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**





In
      September 2006, the SEC staff issued Staff Accounting Bulletin Topic 1N,
“Financial Statements — Considering the Effects of Prior Year Misstatements
      when Quantifying Misstatements in Current Year Financial Statements,” (“SAB
      108”) which is effective for calendar-year companies as of December 31,
      2006. SAB 108 provides guidance on how prior year misstatements should be
      taken into consideration when quantifying misstatements in current year
      financial statements for purposes of determining whether the financial
      statements are materially misstated. SAB 108 requires that public companies
      utilize a “dual-approach” to assessing the quantitative effects of financial
      misstatements, whereby companies should take into account both the effect of
      a
      misstatement on the current year balance sheet as well as the impact upon the
      current year income statement in assessing the materiality of a current year
      misstatement. Once a current year misstatement has been quantified, the guidance
      in SAB Topic 1M, “Financial Statements — Materiality,”
(“SAB 99”) should be applied to determine whether the misstatement is
      material. The adoption of SAB 108 did not have a material impact on the
      Company’s financial condition, results of operations or cash flows.





The
      FASB
      issued Statement of Financial Accounting Standards No. 157, “Fair Value
      Measurements” (“SFAS No. 157”), in September 2006. The new standard provides
      guidance on the definition of and how to measure fair value and what sources
      of
      information are to be used in such measurements. It also prescribes expanded
      disclosures about fair value measurements contained in the financial statements.
      The pronouncement, including the new disclosures, is effective for the Company
      as of the first quarter of 2008. The
      Company is evaluating the
      potential impact of the new standard on its consolidated financial statements;
      however, the Company does not expect the adoption of this standard will have
      a
      material effect on its consolidated financial statements.





**NOTE
      2 - CASH AND CASH EQUIVALENTS**





(in
                thousands)
            
            **December
                31, 2006**
            
            **December
                31, 2005**Money
                market funds
            
            $
            14,733
            
            $
            13,383Checking
                and bank deposits
            
            
            34,003
            
            
            54,792Total
            
            $
            48,736
            
            $
            68,175





**NOTE
      3 - INVESTMENT SECURITIES**





The
      following tables summarize the Company’s investment securities at December 31,
      2006 and December 31, 2005 (regarding assumptions used for estimating fair
      value, see “Note 8 - Fair Value of Financial Instruments.”):





**December
                31,
                2006**(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 January and October
                2007) (Held-to-maturity)
            
            $
            21,959
            
            $
            —
            
            $
            (73
            )
            $
            21,886Auction
                notes (Available-for-sale) *
            
            
            41,700
            
            
            —
            
            
            —
            
            
            41,700$
            63,659
            
            $
            —
            
            $
            (73
            )
            $
            63,586Long-term
                investments:Obligations
                of domestic governmental agencies (mature between April and May 2008)
                (Held-to-maturity)
            
            $
            12,690
            
            $
            2
            
            $
            (19
            )
            $
            12,673$
            12,690
            
            $
            2
            
            $
            (19
            )
            $
            12,673




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)
                (Held-to-maturity)
            
            $
            7,150
            
            $
            —
            
            $
            (49
            )
            $
            7,101Auction
                notes (Available-for-sale) *
            
            
            10,050
            
            
            —
            
            
            —
            
            
            10,050US
                corporate debt securities (mature between March and May 2006)
                (Held-to-maturity)
            
            
            1,072
            
            
            —
            
            
            (4
            )
            
            1,068$
            18,272
            
            $
            —
            
            $
            (53
            )
            $
            18,219Long-term
                investments:Obligations
                of domestic governmental agencies (mature between January and July
                2007)
                (Held-to-maturity)
            
            $
            13,950
            
            $
            —
            
            $
            (90
            )
            $
            13,860US
                corporate debt securities (Held-to-maturity)
            
            
            —
            
            
            —
            
            
            —
            
            
            —$
            13,950
            
            $
            —
            
            $
            (90
            )
            $
            13,860





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




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





(in
                thousands)
            
            **December
                31, 2006**
            
            **December
                31, 2005**Manufacturing
                suite and equipment
            
            $
            8,162
            
            $
            663Lab
                equipment
            
            
            38
            
            
            —Leasehold
                improvements
            
            
            16
            
            
            16Office
                furniture and equipment
            
            
            311
            
            
            308Computers,
                software and related equipment
            
            
            318
            
            
            2348,845
            
            
            1,221Accumulated
                depreciation and amortization
            
            
            (356
            )
            
            (217
            )Net
                book value
            
            $
            8,489
            
            $
            1,004





The
      Company has incurred, and will continue to incur, manufacturing capital
      expenditures relating to the scale-up for larger scale production. Accordingly,
      the Company’s manufacturing suite and equipment costs is not yet in production
      and is not amortized or depreciated until it is ready for its intended
      use.




F-17





Depreciation
      expense for the years ended December 31, 2006, 2005 and 2004 was approximately
      $139,000, $102,000 and $67,000, respectively. The following table summarizes
      depreciation expense for the years ended December 31, 2006, 2005 and 2004.





**For
                the year ended December
                31**(in
                thousands)
            
            **2006**
            
            **2005**
            
            **2004**Depreciation
                expense:Cost
                of services
            
            $
            2
            
            $
            4
            
            $
            7Research
                and development
            
            
            90
            
            
            72
            
            
            44General
                and administrative
            
            
            47
            
            
            26
            
            
            16Total
            
            $
            139
            
            $
            102
            
            $
            67





**NOTE
      5 - OTHER ASSETS**





(in
                thousands)
            
            **December
                31, 2006**
            
            **December
                31, 2005**Patents
                and other intangible assets
            
            $
            1,007
            
            $
            352Long-term
                deposits
            
            
            322
            
            
            67Deferred
                registration fees
            
            
            22
            
            
            491,351
            
            
            468Accumulated
                amortization
            
            
            (393
            )
            
            (308
            )$
            958
            
            $
            160





Amortization
      expense for the years ended December 31, 2006, 2005 and 2004 was approximately
      $84,000, $88,000 and $88,000, respectively. The Company expects amortization
      expense for the years ended December 31, 2007 and 2008 to be approximately
      $55,000 each year.





**NOTE
      6** **-
      ACQUISITIONS**





**ACCUMIN
      TRANSACTION**





On
      April
      6, 2006, Accumin Diagnostics, Inc. (“ADI”), a wholly-owned subsidiary of the
      Company, completed the acquisition of Accumin TM ,
      a
      novel, patent protected, diagnostic for the direct measurement of total,
      intact urinary albumin, from AusAm Biotechnologies, Inc. (“AusAm”). The Company
      believes that the acquisition of Accumin may help increase the Company’s
      exposure to physicians that treat diabetes, the target market for Sulonex,
      by
      emphasizing the importance of early detection of microalbuminuria.





The
      purchase price of Accumin was $3,996,000, which included the issuance of 245,024
      shares of the Company’s common stock, the assumption of certain liabilities of
      AusAm equal to approximately $345,000 and transaction costs and accrued cash
      settlement costs of approximately $341,000. ADI also entered into a royalty
      arrangement under which ADI may be required to pay up to a maximum of $16.1
      million to AusAm on revenue from a next generation product following FDA
      marketing approval. Keryx filed a registration statement on Form S-3 with the
      Securities and Exchange Commission, or SEC, on April 6, 2006 with respect to
      the
      shares issued to AusAm which was declared effective on June 23, 2006 (the
“Effective Date”). At closing, 300,000 shares were issued to AusAm by Keryx, but
      were held in escrow until the Effective Date. On the Effective Date, 245,024
      shares were released from escrow to AusAm. As of December 31, 2006, 15,646
      shares were issued and outstanding and still held in escrow, pending resolution
      of a dispute over purchase consideration (see Note 14).





The
      Accumin transaction has been accounted for as a purchase by the Company. Under
      the purchase method of accounting, the assets and liabilities assumed from
      AusAm
      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 transaction reflect these
      values.




F-18





The
      following represents the purchase price for Accumin:





(in
                thousands, except share and per share amounts)Assumed
                liabilities
            
            
            
            
            $
            345Number
                of shares of Keryx common stock issued
            
            
            245,024Multiplied
                by Keryx’s average closing bid price per share as quoted on NASDAQ over a
                period of 5 trading days (2 days prior to the Effective Date, the
                Effective Date, and 2 days after the Effective Date)
            
            $
            13.51
            
            
            3,310Other
                transaction costs and accrued cash settlement costs
            
            
            
            
            
            341Total
                purchase price
            
            
            
            
            $
            3,996





The
      excess of the purchase price over the net assets acquired represented goodwill
      of approximately $3,208,000, which has been allocated to our Products segment,
      which is expected to benefit from the synergies of the Accumin
      acquisition.





The
      above
      estimated purchase price has been preliminarily allocated based on an estimate
      of the fair value of net assets acquired. The final valuation of net assets
      is
      expected to be completed as soon as possible, pending resolution of a dispute
      over purchase consideration, but no later than one year from the acquisition
      date. To the extent that these estimated amounts need to be adjusted, the
      Company will do so.





(in
                thousands)Allocation
                of purchase price:Tangible
                assets acquired
            
            $
            132Amortizable
                intangibles (over 12 years - patent life)
            
            
            656Goodwill
            
            
            3,208Purchase
                price
            
            $
            3,996





A
      valuation using the guidance in SFAS No. 141, “Business Combinations” was
      performed with the assistance of independent valuation specialists to determine
      the fair value of certain identifiable intangible assets of Accumin.





The
      fair
      value of certain identifiable intangible assets was determined using the income
      approach. 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 risk of achieving the asset’s
      projected cash flows. The present value of the estimated cash flows are then
      added to the present value equivalent of the residual value of the asset, if
      any, at the end of the discrete projection period to estimate the fair value.





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




·
            revenue
                that is likely to result from the asset, including estimated selling
                price, estimated market share and year-over-year growth
                rates;




·
            operating
                margin; and




·
            sales
                and marketing and general and administrative expenses using historical
                and
                industry or other sources of market
                data;





The
      valuations are based on information that is available as of the acquisition
      date
      and the expectations and assumptions that have been 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 these
      reasons, among others, the actual results may vary from the projected results.





Unaudited
      pro forma financial information has not been presented as the information is
      immaterial to our results of operations.




F-19





**ACCESS
      ONCOLOGY ACQUSITION**





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;




·
            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 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





F-20




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





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 period 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**Revenue
            
            $
            911Net
                loss
            
            $
            (14,086
            )Basic
                and diluted loss per common share
            
            $
            (0.47
            )





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.




F-21





**COMMON
      STOCK**





On
      March
      29, 2006, the Company completed a registered direct offering of 4,500,000 shares
      of its common stock to two institutional investors at $18.40 per share. Total
      proceeds to the Company from this public offering were approximately $82.7
      million, net of offering expenses of approximately $0.1 million. The shares
      were
      sold under a shelf registration statement on Form S-3 (File No. 333-130809)
      filed with the Securities and Exchange Commission, or SEC, on December 30,
      2005,
      and declared effective by the SEC on January 13, 2006, covering shares of the
      Company’s Common Stock having a value not to exceed $150 million.





The
      Company may offer the remaining securities under its shelf registration 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
      February 14, 2006, 100,000 shares were granted to the Company’s newly-appointed
      Chief Financial Officer, at a grant-date fair value of $15.30 per share. 50,000
      of the restricted shares will vest in three equal installments on the first,
      second and third anniversary of the grant date. For the remaining 50,000
      restricted shares, vesting is contingent upon meeting a certain performance
      goal.





During
      2006, the Company issued 245,024 shares of its common stock, valued at
      approximately $3,310,000, to AusAm, in connection with the Company’s purchase of
      Accumin, which closed on April 6, 2006. Keryx filed a registration statement
      on
      Form S-3 with the SEC on April 6, 2006 with respect to the shares issued to
      AusAm which was declared effective on June 23, 2006 (the “Effective Date”). At
      closing, 300,000 shares were issued to AusAm by Keryx, but were held in escrow
      until the Effective Date. On the Effective Date, 245,024 shares were released
      from escrow to AusAm. As of December 31, 2006, 15,646 shares were still held
      in
      escrow (see Note 6 above).





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.





During
      2004, the Company issued 623,145 shares of its common stock, valued at
      approximately $6,325,000, 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.




F-22





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
      OPTIONS, RESTRICTED STOCK AND WARRANTS**





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





a.
      The
      1999 Stock Option Plan was adopted in November 1999. Under the 1999 Stock Option
      Plan, 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 no more than 25 years from the date of the grant, unless
      otherwise authorized by the board. The plan permits the board of directors
      or a
      committee appointed by the board to administer the plan. The administrator
      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.
      No
      additional shares of our common stock may be issued under the 1999 Stock Option
      Plan.





b.
      The
      2000 Stock Option Plan was adopted in June 2000. Under the 2000 Stock Option
      Plan the compensation committee of the Company’s board of directors is
      authorized to 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 no more
      than 10 years from the date of the grant, unless authorized by the board. As
      of
      December 31, 2006, up to 13,131 additional shares may be issued under the 2000
      Stock Option Plan.





c.
      The
      Non-Plan was adopted in February 2000. Under the Non-Plan, 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. No additional
      shares of our common stock may be issued under the Non-Plan.





d.
      The
      2002 CEO Incentive Stock Option Plan was adopted in December 2002. Under the
      2002 CEO Incentive Stock Option Plan 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 10 years from the date of the grant. 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. As of December 31, 2006, the option granted under the
      2002 CEO Incentive Stock Option Plan has fully vested. 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 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. No additional shares of
      our
      common stock may be issued under the 2002 CEO Incentive Stock Option
      Plan.




F-23





e.
      The
      2004 President Incentive Stock Option Plan was adopted in February 2004. Under
      the 2004 President Incentive Stock Option Plan 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 10 years from the date of the grant. The option granted to the newly
      appointed President was made pursuant to an employment agreement following
      the
      acquisition of ACCESS Oncology in February 2004. Of this option, 166,667 vests
      over a three-year period and 833,333 vests upon the earlier of the achievement
      of certain performance-based milestones or February 5, 2011. As of December
      31,
      2006, 486,111 options have vested under this plan. 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 February 5, 2014. Additionally, the Company’s board of
      directors shall have the discretion to accelerate all or a portion of these
      options at any time. No additional shares of our common stock may be issued
      under the 2004 President Incentive Stock Option Plan.





f.
      The
      2004 Long-Term Incentive Plan was adopted in June 2004 by our stockholders.
      Under the 2004 Long-Term Incentive Plan, the compensation committee of the
      Company’s board of directors is authorized to 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 no more than 10 years from the date
      of
      their grant. As of December 31, 2006, up to an additional 139,027 shares may
      be
      issued under the 2004 Long-Term Incentive Plan.





g.
      The
      2006 CFO Incentive Plan was adopted in February 2006. Under the 2006 CFO
      Incentive Plan the Company’s board of directors granted an option to the
      newly-appointed Chief Financial Officer of the Company to purchase up to 500,000
      shares of authorized but unissued common stock. The option has a term of 10
      years from the date of the grant. The option granted to the newly appointed
      Chief Financial Officer was made pursuant to an employment agreement. Of these
      options, 55,556 vest on the one-year anniversary of employment and 13,889 vest
      every three months following the one-year anniversary of employment until the
      36th month of employment; and 333,333 vest after seven years, provided that
      the
      newly appointed Chief Financial Officer remains employed by the Company on
      such
      date. The 333,333 options may vest earlier upon the achievement of certain
      milestones, of which 111,111 have vested as of December 31, 2006. No additional
      shares of our common stock may be issued under the 2006 CFO Incentive
      Plan.





The
      following table summarizes equity awards authorized by the Company as of
      December 31, 2006.





**Plan**
            
            **Exercise**
              **price**
            
            **Authorized**
            
            **Outstanding**
            
            **Exercised**
            
            **Exercisable**
            
            **Available**
              **for
                grant**1999
                Stock Option Plan
            
            $
            0.10
                - 1.30
            
            
            4,230,000
            
            
            619,195
            
            
            3,505,305
            
            
            619,195
            
            
            —2000
                Stock Option Plan
            
            
            1.10
                - 14.64
            
            
            4,455,000
            
            
            2,937,925
            
            
            1,503,944
            
            
            2,033,456
            
            
            13,131Non
                Plan
            
            
            0.33
            
            
            240,000
            
            
            60,000
            
            
            157,500
            
            
            60,000
            
            
            —2002
                CEO Incentive Stock Option Plan
            
            
            1.30
            
            
            2,002,657
            
            
            2,002,657
            
            
            —
            
            
            2,002,657
            
            
            —2004
                President Incentive Plan
            
            
            9.25
            
            
            1,000,000
            
            
            1,000,000
            
            
            —
            
            
            486,111
            
            
            —2004
                Long-Term Incentive Plan
            
            
            7.13
                - 18.06
            *
            
            4,000,000
            
            
            3,729,936
            
            
            131,037
            
            
            866,464
            
            
            139,0272006
                CFO Incentive Plan
            
            
            15.30
            
            
            500,000
            
            
            500,000
            
            
            —
            
            
            111,111
            
            
            —16,427,657
            
            
            10,849,713
            
            
            5,297,786
            
            
            6,178,994
            
            
            152,158




*
      Exercise price range excludes restricted stock.




F-24





A
      summary
      of the status of the Company’s equity awards as of December 31, 2006, 2005,
      2004, and changes during the years then ended is presented in the tables
      below.





**Outstanding
                equity awards****Shares**
              **available**
            
            **Number**
              **of
                shares**
            
            **Weighted-**
              **average**
              **exercise
                price**Balance,
                December 31, 2003
            
            
            1,110,072
            
            
            8,004,309
            
            
            1.42Authorized
            
            
            5,000,000Granted
            
            
            (1,870,000
            )
            
            1,870,000
            
            
            8.86Exercised
            
            
            —
            
            
            (2,184,438
            )
            
            1.35Forfeited
                and expired
            
            
            15,250
            
            
            (15,250
            )
            
            8.15Balance,
                December 31, 2004
            
            
            4,255,322
            
            
            7,674,621
            
            
            3.24Authorized
            
            
            —Granted
            
            
            (952,500
            )
            
            952,500
            
            
            11.50Exercised
            
            
            —
            
            
            (520,969
            )
            
            1.27Forfeited
                and expired
            
            
            81,500
            
            
            (81,500
            )
            
            11.96Balance,
                December 31, 2005
            
            
            3,384,322
            
            
            8,024,652
            
            
            4.26Authorized
            
            
            500,000Granted
            
            
            (3,799,660
            )
            
            3,799,660
            
            
            14.11Exercised
            
            
            —
            
            
            (824,103
            )
            
            2.41Canceled
            
            
            (83,000
            )Forfeited
                and expired
            
            
            150,496
            
            
            (150,496
            )
            
            6.09Balance,
                December 31, 2006
            
            
            152,158
            
            
            10,849,713
            
            
            7.82Exercisable
                at December 31, 2004
            
            
            
            
            
            3,807,576
            
            
            1.75Exercisable
                at December 31, 2005
            
            
            
            
            
            4,360,135
            
            
            2.37Exercisable
                at December 31, 2006
            
            
            
            
            
            6,178,994
            
            
            3.92





As
      discussed above, as of December 31, 2006, there were 100,000 shares of
      restricted stock outstanding under the 2004 Long-Term Incentive Plan (included
      in the tables above).





A
      summary
      of share-based compensation activity for the year ended December 31, 2006 is
      presented below:





**Stock
      Options**




**Number
                of Options**
            
            **Exercise**
              **price
                per**
              **share**
            
            **Weighted-average**
              **exercise
                price**
            
            **Weighted-average**
              **remaining
                contractual term**
              **(years)**
            
            **Aggregate
                intrinsic value**Outstanding
                at January 1, 2006
            
            
            8,024,652
            
            $
            0.10
                - $16.67
            
            $
            4.26
            
            
            7.2
            
            $
            83,296,000Granted
            
            
            3,699,660
            
            
            10.51
                - 18.06
            
            
            14.49Exercised
            
            
            (824,103
            )
            
            0.10
                - 12.19
            
            
            2.41Forfeited
                and expired
            
            
            (150,496
            )
            
            0.10
                - 17.16
            
            
            6.09Outstanding
                at December 31, 2006
            
            
            10,749,713
            
            
            0.10
                - 18.06
            
            
            7.90
            
            
            7.6
            
            
            58,048,000Vested
                and expected to vest at December 31, 2006
            
            
            10,706,853
            
            
            0.10
                - 18.06
            
            
            7.88
            
            
            7.6
            
            
            58,031,000Exercisable
                at December 31, 2006
            
            
            6,178,994
            
            
            0.10
                - 16.67
            
            
            3.92
            
            
            6.7
            
            
            57,959,000




The
      aggregate intrinsic value in the table above
      represents the total intrinsic value (the difference between the Company’s
      closing common stock price and the exercise price, multiplied by the number
      of
      in-the-money options) that would have been received by the option holders had
      all option holders exercised their options as of that date. Upon the exercise
      of
      outstanding options, the Company intends to issue new shares.




F-25





**For
                the year ended December
                31****2006**
            
            **2005**
            
            **2004**Weighted-average
                fair value of options granted during the period at an exercise price
                equal
                to market price at issue date
            
            $
            7.79
            
            $
            7.84
            
            $
            5.87Weighted-average
                exercise price of options granted during the period at an exercise
                price
                equal to market price at issue date
            
            
            14.49
            
            
            11.50
            
            
            8.91Weighted-average
                fair value of options granted during the period at an exercise price
                greater than market price at issue date
            
            
            N/A
            
            
            N/A
            
            
            N/AWeighted-average
                exercise price of options granted during the period at an exercise
                price
                greater than market price at issue date
            
            
            N/A
            
            
            N/A
            
            
            N/A





The
      following table summarizes information about stock options outstanding at
      December 31, 2006:





**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
            
            
            271,852
            
            
            17.9
            
            $
            0.10
            
            
            271,852
            
            $
            0.100.11
                - 0.50
            
            
            60,000
            
            
            3.1
            
            $
            0.33
            
            
            60,000
            
            $
            0.330.51
                - 3.00
            
            
            4,014,735
            
            
            5.9
            
            $
            1.30
            
            
            4,014,735
            
            $
            1.303.01
                - 5.75
            
            
            329,190
            
            
            6.8
            
            $
            4.55
            
            
            248,721
            
            $
            4.545.76
                - 10.00
            
            
            1,146,000
            
            
            7.1
            
            $
            9.15
            
            
            581,799
            
            $
            9.1210.01
                - 19.00
            
            
            4,927,936
            
            
            8.6
            
            $
            13.73
            
            
            1,001,887
            
            $
            12.5210,749,713
            
            
            
            
            
            
            
            
            6,178,994





At
      December 31, 2006, 4,696,829 options issued to directors and employees and
      600,957 options issued to consultants have been exercised. The terms of the
      outstanding options at December 31, 2006 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
            
            
            261,852
            
            
            17.9
            
            $
            0.10
            
            
            261,852
            
            $
            0.100.11
                - 0.50
            
            
            60,000
            
            
            3.1
            
            
            0.33
            
            
            60,000
            
            
            0.330.51
                - 3.00
            
            
            3,823,735
            
            
            5.9
            
            
            1.30
            
            
            3,832,485
            
            
            1.303.01
                - 5.75
            
            
            213,936
            
            
            7.1
            
            
            4.70
            
            
            153,571
            
            
            4.445.76
                - 10.00
            
            
            1,116,000
            
            
            7.0
            
            
            9.20
            
            
            558,924
            
            
            9.2010.01
                - 19.00
            
            
            4,507,436
            
            
            8.6
            
            
            13.86
            
            
            858,137
            
            
            12.709,982,959
            
            
            
            
            
            
            
            
            5,724,969




As
      of December 31, 2006, 4,377,166 options issued to
      directors and employees are milestone-based, of which 3,379,944 options are
      vested and exercisable.


F-26




*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
            
            
            10,000
            
            
            17.9
            
            $
            0.10
            
            
            10,000
            
            $
            0.100.11
                - 0.50
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —0.51
                - 3.00
            
            
            191,000
            
            
            6.2
            
            
            1.14
            
            
            182,250
            
            
            1.143.01
                - 5.75
            
            
            115,254
            
            
            6.1
            
            
            4.28
            
            
            95,150
            
            
            4.705.76
                - 10.00
            
            
            30,000
            
            
            7.6
            
            
            7.13
            
            
            22,875
            
            
            7.3210.01
                - 19.00
            
            
            420,500
            
            
            7.7
            
            
            12.30
            
            
            143,750
            
            
            11.42766,754
            
            
            
            
            
            
            
            
            454,025





As
      of
      December 31, 2006, 93,000 options issued to consultants are milestone-based,
      of
      which 43,000 options are vested and exercisable.





**Restricted
      Stock**


**Number
                of Shares**
            
            **Average
                Grant Date****Fair
                Value**Nonvested,
                January 1, 2006
            
            
            —
            
            
            —Granted
            
            
            100,000
            
            $
            15.30Vested
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —Nonvested,
                December 31, 2006
            
            
            100,000
            
            $
            15.30





There
      have been no restricted stock issuances prior to January 1, 2006.





**Warrants**


**Warrants**
            
            **Weighted-**
              **average**
              **exercise
                price**Balance,
                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
            
            $
            4.65Issued
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —Canceled
            
            
            —
            
            
            —Balance,
                December 31, 2006
            
            
            321,976
            
            $
            4.65




F-27




As
      of
      December 31, 2006, 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, 2006 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
            
            
            3.0
            
            $
            0.01
            
            
            72,564
            
            $
            0.016.00
            
            
            249,412
            
            
            1.9
            
            
            6.00
            
            
            249,412
            
            
            6.00321,976
            
            
            2.1
            
            $
            4.65
            
            
            321,976
            
            $
            4.65





**Stock-based
      Compensation**





The
      application of SFAS No. 123R had the following effect on reported amounts,
      for
      the year ended December 31, 2006, relative to amounts that would have been
      reported using the intrinsic value method under previous
      accounting:





**Year
                ended**(in
                thousands, except per share amounts)
            
            **December
                31,2006**Net
                loss, using previous accounting method
            
            $
            (62,097
            )Basic
                and diluted loss per ordinary share, using previous method
            
            
            (1.48
            )Impact
                of the adoption of SFAS No. 123R
            
            
            (11,667
            )Net
                loss, as reported
            
            
            (73,764
            )Basic
                and diluted loss per ordinary share, as reported
            
            $
            (1.76
            )





The
      value
      of these options has been estimated using the Black-Scholes model. The expected
      term of options granted is derived from historical data and the expected vesting
      period. Expected volatility is based on the historical volatility of the
      Company’s common stock and the Company’s assessment of its future volatility.
      The risk-free interest rate is based on the U.S. Treasury yield for a period
      consistent with the expected term of the option in effect at the time of the
      grant. The Company has assumed no expected dividend yield, as dividends have
      never been paid to stock or option holders and will not be for the foreseeable
      future.





The
      weighted average fair market value of options and restricted stock granted
      during the year ended December 31, 2006, as of the date of the grant, was $7.79
      and $15.30, respectively.  The assumptions used in the calculation of the
      fair value of options granted during the year ended December 31, 2006 were
      a
      weighted average expected term of 3.1 years, a weighted average expected
      volatility rate of 78.31% and a weighted average risk-free interest rate of
      4.74%.  The Company used historical information to estimate
      forfeitures within the valuation model. As of December 31, 2006, there was
      $21.8
      million of total unrecognized compensation cost, related to nonvested stock
      options and restricted stock, which is expected to be recognized over a
      weighted-average period of 2.5 years. That
      amount does not include, as of December 31, 2006, 1,047,222 options and 50,000
      shares of restricted stock outstanding, which are milestone-based and vest
      upon
      certain corporate milestones, such as FDA approval of our drug candidates,
      market capitalization targets and a qualified change in control. Stock-based
      compensation will be measured and recorded if and when a milestone
      occurs.




F-28





The
      following table summarizes stock-based compensation expense information about
      stock options, restricted stock and warrants outstanding at December 31,
      2006:





**Year
                ended**(in
                thousands)
            
            **December
                31,2006**Stock-based
                compensation expenses associated with restricted stock
            
            $
            189Stock-based
                compensation expense associated with option grants to employee and
                directors+
            
            
            12,536Stock-based
                compensation expense associated with option grants to
                consultants
            
            
            2,187Stock-based
                compensation expense associated with warrants
            
            
            —14,912


+
              Includes
                  additional non-cash compensation expense during the year ended
                  December
                  31, 2006 of $106,000, relating to a previous grant made to a former
                  director.  The Company also incurred additional non-cash compensation
                  expense during the year ended December 31, 2006, of $1,697,000,
                  relating
                  to previous grants made to a former officer and two additional
                  former
                  directors.  The Board of Directors agreed to modify their option
                  agreements such that their vesting and exercisability has been
                  extended
                  beyond the terms of their original
                  agreements.





Prior
      to
      January 1, 2006, the Company applied 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 Financial Accounting Standards Board (“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 non-employee directors. Under this
      method, compensation expense was recorded on the date of grant only if the
      current market price of the underlying stock exceeded the exercise price. Prior
      to January 1, 2006, the Company provided pro forma disclosure amounts in
      accordance with SFAS No. 123, as amended by Statement of Financial Accounting
      Standards No. 148 “Accounting for Stock-Based Compensation — Transition and
      Disclosure,” (“SFAS No. 148”). As compensation expense was disclosed but not
      recognized in periods prior to January 1, 2006, no cumulative adjustment
      for forfeitures was recorded in 2006. The following is a pro forma unaudited
      presentation illustrating the effect on net loss and net loss per share if
      the
      Company had applied the fair value recognition provisions of SFAS No. 123 to
      stock-based employee compensation for the years ended prior to the adoption
      of
      SFAS No. 123R.





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





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%.




F-29





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 and 2004, the Company recorded non-cash compensation
      expense of approximately $924,000 and $833,000, 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.





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 and
      2004,
      the Company did not record any non cash compensation expense, as all warrants
      were vested. 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 had been estimated using the Black-Scholes
      model. No warrants were issued in 2005 and 2004.





**Review
      of Stock Option Grant Procedures**





At
      the
      direction of the Company’s Board of Directors, the Company commenced an internal
      review into the Company’s historical stock option practices from the date of its
      initial public offering through the second quarter of 2006 under the Company’s
      stock option plans in effect during this period, including a review of the
      underlying option grant documentation and procedures. This internal review
      was
      completed during the third quarter of 2006 and is discussed below.





During
      the Company’s early history as a public company, the Company generally utilized
      meetings or unanimous written consents signed by all members of the applicable
      committee to approve multiple option grants, the effective dates of which
      preceded the date of the meeting or written consent. The Company has determined
      that the proper measurement date, for accounting purposes, may differ from
      the
      legal effective date. The Company also historically considered the effective
      date specified in the written consents as the accounting measurement date for
      determining stock-based compensation expense. However, the Company has concluded
      that in some instances the proper measurement date for accounting purposes
      may
      not be the effective date of the grant, if the terms of the stock option grant
      were not communicated to the optionee within a reasonable period of time after
      the grant was effective. In such instance, the measurement date may be such
      later date on which the terms were actually communicated.





Based
      on
      the results of the Company’s review of its historical stock option practices,
      including its underlying option grant documentation and procedures, the Company
      determined that the additional compensation expense resulting from revised
      measurement dates was not material for any period.





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





The
      Company’s financial instruments at December 31, 2006 and 2005 consisted of cash
      and cash equivalents, investment securities, accrued interest receivable, 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, 2006, the Company has U.S. net operating loss carryforwards of
      approximately $172 million which expire from 2019 through 2026. 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 assets are not realizable. The valuation allowance for deferred
      tax
      assets was $95 million and $57.9 million as of December 31, 2006 and 2005,
      respectively. If the entire deferred tax asset were realized, $15.3 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-30





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, 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, $0 and $1,000, for the years ended December 31, 2006, 2005 and 2004,
      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)
            
            **2006**
            
            **2005**
            
            **2004**Losses
                before taxes on income, as reported in the consolidated statements
                of
                operations
            
            $
            (73,764
            )
            $
            (26,895
            )
            $
            (32,943
            )Computed
                “expected” tax benefit
            
            
            (25,817
            )
            
            (9,413
            )
            
            (11,530
            )Increase
                (decrease) in income taxes resulting from:Expected
                benefit from state & local taxes
            
            
            (8,154
            )
            
            (3,379
            )
            
            (2,853
            )Change
                in state and local effective tax rate
            
            
            (831
            )
            
            (3,130
            )
            
            —Permanent
                differences, including IPR&D of $6,580 in 2004
            
            
            1,067
            
            
            (571
            )
            
            6,586Effect
                of foreign operations
            
            
            —
            
            
            —
            
            
            143Change
                in the balance of the valuation allowance for deferred tax assets
                allocated to income tax expense
            
            
            33,735
            
            
            16,493
            
            
            7,654$
            —
            
            $
            —
            
            $
            —





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)
            
            **2006**
            
            **2005**
            
            **2004**Deferred
                tax benefit
            
            $
            (37,129
            )
            $
            (18,931
            )
            $
            (19,104
            )Federal
                deferred tax benefit relating to the exercise of stock
                options
            
            
            3,394
            
            
            2,438
            
            
            5,926Federal
                deferred tax benefit relating to ACCESS Oncology
            
            
            —
            
            
            —
            
            
            5,524Increase
                in the valuation allowance for deferred tax assets
            
            
            33,735
            
            
            16,493
            
            
            7,654$
            —
            
            $
            —
            
            $
            —




F-31




The
        tax
        effects of temporary differences that give rise to significant portions of
        the
        deferred tax assets and deferred tax liabilities at December 31, 2006 and
        2005
        are presented below.




(in
                thousands)
            
            **December
                31, 2006**
            
            **December
                31, 2005**Deferred
                tax assets/(liabilities):Net
                operating loss carryforwards
            
            $
            78,235
            
            $
            45,697Net
                operating loss carryforwards (ACCESS Oncology)
            
            
            6,128
            
            
            6,128Non-cash
                compensation
            
            
            7,843
            
            
            2,298Research
                and development
            
            
            1,977
            
            
            2,457Intangible
                assets due to different amortization methods
            
            
            730
            
            
            870Accrued
                compensation
            
            
            19
            
            
            357Other
                temporary differences
            
            
            72
            
            
            68Net
                deferred tax asset, excluding valuation allowance
            
            
            95,004
            
            
            57,875Less
                valuation allowance
            
            
            (95,004
            )
            
            (57,875
            )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)
            
            **2006**
            
            **2005**
            
            **2004**Interest
                income
            
            $
            6,378
            
            $
            2,317
            
            $
            690Interest
                expense and other bank charges
            
            
            —
            
            
            —
            
            
            (27
            )Other
                income
            
            
            15
            
            
            —
            
            
            107$
            6,393
            
            $
            2,317
            
            $
            770





In
      2006,
      other income consisted of rental income from a related-party. 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 $70,530,000 through
      December 2010. The following table shows future research and development payment
      obligations by period as of December 31, 2006.





(in
                thousands)
            
            2007
            
            2008
            
            2009
            
            2010
            
            2011Research
                and development agreements
            
            $
            31,205
            
            $
            23,086
            
            $
            16,097
            
            $
            142
            
            
            —





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 $658,000, $514,000 and $240,000 for
      the
      years ended December 31, 2006, 2005, and 2004, respectively.





Future
      minimum lease commitments as of December 31, 2006, in the aggregate total
      approximately $2,568,000 through 2010. The following table shows future minimum
      lease commitments by period as of December 31, 2006.





(in
                thousands)
            
            2007
            
            2008
            
            2009
            
            2010
            
            2011Operating
                leases
            
            $
            788
            
            $
            724
            
            $
            597
            
            $
            459
            
            
            —




F-32




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 $49,000, $48,000 and $50,000 in 2006, 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, 2006 and 2005, respectively. The 2004 and 2005 amounts
      have been paid, and the 2006 amount is yet to be paid.





**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 $77.4 million over the life of the licenses,
      of
      which approximately $58.8 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 two licensors $50,000
      and $22,500, respectively, annually until the licenses expire. As of December
      31, 2006, the Company has recorded a total of $2,922,500 in license and
      milestone payments in regard to these license agreements since inception.





The
      Company has also committed to pay to the former stockholders of ACCESS Oncology
      certain contingent equity rights (up to 3,372,422 shares of the Company’s common
      stock) if its drug candidates meet certain development milestones (see Note
      6 —
Acquisitions —ACCESS Oncology Acquisition). The Company has also entered into a
      royalty arrangement under which its wholly-owned subsidiary may be required
      to
      pay up to a maximum of $16.1 million to AusAm.





**NOTE 12
      - BONUS TO OFFICER**





Pursuant
      to his employment agreement, the Chief
      Executive Officer of the Company
      was entitled to receive a one-time $2 million cash bonus due to the achievement
      of a corporate milestone that occurred ,
      and was
      expensed and paid
      in 2006. Of this amount, $1,000,000 was included in other research and
      development expenses and $1,000,000 was included in other selling, general
      and
      administrative expenses for the year ended December 31, 2006.





**NOTE
      13 - SEGMENT INFORMATION**





The
      Company has three reportable segments: Diagnostics, Services and Products.
      The
      Diagnostics business sells diagnostic products for the direct measurement of
      total, intact urinary albumin. The Services business provides clinical trial
      management and site recruitment services to other biotechnology and
      pharmaceutical companies. The Products business focuses on the acquisition,
      development and commercialization of medically important, novel pharmaceutical
      products for the treatment of life-threatening diseases, including diabetes
      and
      cancer.





Segment
      information for the years ended December 31, 2006, 2005 and 2004 were as
      follows:





**Revenue****Amounts
                accumulated during the development**(in
                thousands)
            
            **2006**
            
            **2005**
            
            **2004**
            
            **Stage**Diagnostics
            
            $
            103
            
            $
            —
            
            $
            —
            
            $
            103Services
            
            
            431
            
            
            574
            
            
            809
            
            
            1,814Products
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            534
            
            $
            574
            
            $
            809
            
            $
            1,917




F-33




**Operating
                loss****Amounts
                accumulated during the development**(in
                thousands)
            
            **2006**
            
            **2005**
            
            **2004**
            
            **Stage**Diagnostics
            
            $
            (1,016
            )
            $
            —
            
            $
            —
            
            $
            (1,016
            )Services
            
            
            41
            
            
            (245
            )
            
            (26
            )
            
            (230
            )Products
            
            
            (79,182
            )
            
            (28,967
            )
            
            (33,686)
            )
            
            (199,837
            )Total
            
            $
            (80,157
            )
            $
            (29,212
            )
            $
            (33,712
            )
            $
            (201,083
            )





A
      reconciliation of the totals reported for the operating segments to the
      consolidated total net loss is as follows:





**Net
                loss****Amounts
                accumulated during the development**(in
                thousands)
            
            **2006**
            
            **2005**
            
            **2004**
            
            **Stage**Operating
                losses of reportable segments
            
            $
            (80,157
            )
            $
            (29,212
            )
            $
            (33,712
            )
            $
            (201,083
            )Interest
                and other income
            
            
            6,393
            
            
            2,317
            
            
            770
            
            
            13,362Income
                taxes
            
            
            —
            
            
            —
            
            
            (1
            )
            
            (491
            )Consolidated
                net loss
            
            $
            (73,764
            )
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (188,212
            )




All
      long-lived assets, other than the acquired intangibles for Accumin and other
      immaterial assets, reside in the Products segment.





The
      excess of the purchase price over the net assets acquired in the Accumin
      transaction represented goodwill of approximately $3,208,000, which has been
      allocated to our Products segment, which is expected to benefit from the
      synergies of the acquisition. The carrying amount of goodwill by reportable
      segment as of December 31, 2006 and 2005 was as follows:





**Goodwill**(in
                thousands)
            
            **December
                31, 2006**
            
            **December
                31, 2005**Diagnostics
            
            
            —
            
            
            —Services
            
            
            —
            
            
            —Products
            
            $
            3,208
            
            
            —Total
            
            $
            3,208
            
            
            —





**NOTE
      14 - 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 New Israeli
      Shekels, or approximately $1,032,000, 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
      filed a motion to dismiss the complaint. The plaintiff has filed a response
      to
      each answer. At this time, the Circuit Court of Jerusalem has not issued a
      decision with respect to the motion to dismiss.  A hearing on a motion by
      Keryx Biopharmaceuticals, Inc. and Michael S. Weiss to vacate service of process
      outside of Israel was held in June 2006. In October 2006, the Circuit Court
      of
      Jerusalem held that the service of process on Keryx Biopharmaceuticals, Inc.
      was
      valid.  The Company has appealed this determination and the appeal is
      currently pending.  The Circuit Court of Jerusalem held that the service of
      process on Michael S. Weiss was invalid. Consequently, the Circuit Court of
      Jerusalem dismissed the suit against Mr. Weiss. 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-34





In
      April
      2006, the Company acquired the assets of the diagnostics business of AusAm
      Biotechnologies, Inc., a debtor in a pending Chapter 11 proceeding, in a
      court-approved transaction.  Subsequent to the closing, disputes arose
      between the debtor and Keryx relating to the determination of the purchase
      consideration under the acquisition agreement. On July 31, 2006, the debtor
      filed a motion purporting to seek to enforce the terms of the acquisition
      agreement and alleging damages in the amount of $818,145. (In re:  AusAm
      Biotechnologies, Inc., Chapter 11 Case No. 06-10214 (RDD) (Bankr.
      S.D.N.Y.)). Keryx opposed the motion and asserted a counterclaim alleging
      fraud in connection with the acquisition. The parties have agreed to a
      settlement in principle of the matter, subject to documentation and Bankruptcy
      Court approval, pursuant to which Keryx will pay AusAm approximately
      $110,000.




**NOTE
      15 - QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)**





**2006****Mar.
                31**
            
            **June
                30**
            
            **Sept.
                30**
            
            **Dec.
                31**(in
                thousands, except per share data)**Revenue:**Diagnostic
                revenue
            
            $
            —
            
            $
            23
            
            $
            35
            
            $
            45Service
                revenue
            
            
            112
            
            
            224
            
            
            39
            
            
            56**Total
                revenue**
            
            
            112
            
            
            247
            
            
            74
            
            
            101**Operating
                expenses:**Cost
                of diagnostics sold
            
            
            —
            
            
            19
            
            
            50
            
            
            71Cost
                of services
            
            
            171
            
            
            98
            
            
            29
            
            
            92Research
                and development:Non-cash
                compensation
            
            
            2,724
            
            
            2,104
            
            
            1,378
            
            
            298Other
                research and development
            
            
            12,333
            
            
            12,352
            
            
            14,950
            
            
            16,504Total
                research and development
            
            
            15,057
            
            
            14,456
            
            
            16,328
            
            
            16,802Selling,
                general and administrative:Non-cash
                compensation
            
            
            2,817
            
            
            3,541
            
            
            1,481
            
            
            569Other
                selling, general and administrative
            
            
            2,645
            
            
            1,860
            
            
            2,041
            
            
            2,564Total
                selling, general and administrative
            
            
            5,462
            
            
            5,401
            
            
            3,522
            
            
            3,133**Total
                operating expenses**
            
            
            20,690
            
            
            19,974
            
            
            19,929
            
            
            20,098**Operating
                loss**
            
            
            (20,578
            )
            
            (19,727
            )
            
            (19,855
            )
            
            (19,997
            )**Other
                income (expense)**Interest
                and other income, net
            
            
            982
            
            
            1,899
            
            
            1,862
            
            
            1,650**Net
                loss**
            
            $
            (19,596
            )
            $
            (17,828
            )
            $
            (17,993
            )
            $
            (18,347
            )**Net
                loss per common share**Basic
                and diluted
            
            $
            (0.51
            )
            $
            (0.41
            )
            $
            (0.42
            )
            $
            (0.42
            )





F-35





**2005****Mar.
                31**
            
            **June
                30**
            
            **Sept.
                30**
            
            **Dec.
                31**(in
                thousands, except per share data)Diagnostic
                revenue
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Service
                revenue
            
            
            157
            
            
            126
            
            
            82
            
            
            209**Total
                revenue**
            
            
            157
            
            
            126
            
            
            82
            
            
            209**Operating
                expenses:**Cost
                of diagnostics sold
            
            
            —
            
            
            —
            
            
            —
            
            
            —Cost
                of services
            
            
            181
            
            
            161
            
            
            197
            
            
            280Research
                and development:Non-cash
                compensation
            
            
            176
            
            
            137
            
            
            226
            
            
            55Other
                research and development
            
            
            4,042
            
            
            5,180
            
            
            6,501
            
            
            8,459Total
                research and development
            
            
            4,218
            
            
            5,317
            
            
            6,727
            
            
            8,514Selling,
                general and administrative:Non-cash
                compensation
            
            
            185
            
            
            168
            
            
            258
            
            
            164Other
                selling, general and administrative
            
            
            645
            
            
            699
            
            
            671
            
            
            1,401Total
                selling, 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
            
            
            987**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
            )





F-36




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 16, 2007


**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 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 16, 2007, and in the capacities indicated:





**Signatures**
            
            **Title**/s/
                Michael S. Weiss
            
            Chairman
                and Chief Executive OfficerMichael
                S. Weiss
            
            (principal
                executive officer)/s/
                Ronald C. Renaud, Jr.
            
            Senior
                Vice President, Chief Financial Officer, Secretary and
                TreasurerRonald
                C. Renaud, Jr.
            
            (principal
                financial and accounting officer)/s/
                I. Craig Henderson, M.D.
            
            President
                and DirectorI.
                Craig Henderson, M.D./s/
                Senator Wyche Fowler, Jr.
            
            DirectorSenator
                Wyche Fowler, Jr./s/
                Malcolm Hoenlein
            
            DirectorMalcolm
                Hoenlein/s/
                Jack Kaye, CPA
            
            DirectorJack
                Kaye, CPA/s/
                Eric A. Rose, M.D.
            
            DirectorEric
                A. Rose, M.D.








**EXHIBIT
      INDEX**





**Exhibit****Number**
            
            **Exhibit
                Description**10.25
            
            CFO
                Incentive Stock Option Agreement dated February 14, 2006.10.26
            
            President
                Incentive Stock Option Agreement dated February 5, 2004.21.1
            
            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 16, 2007.31.2
            
            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 16, 2007.32.1
            
            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 16,
                2007.32.2
            
            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 16,
                2007.