**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,
                2007.**




**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**
            **13-4087132**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                No.)





**750
                Lexington Avenue**
              **New
                York, New York**
            **10022**(Address
                of principal executive offices)
            (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)
            NASDAQ
                Global Market
              (Name
                of Each Exchange on Which
                Registered)





**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 o
            Accelerated
                filer xNon-accelerated
                filer o
            Smaller
                reporting company o





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 $424,156,031 as of
      June 30, 2007, based on the closing sale price of such stock as reported on the
      Nasdaq Global Market .





There
      were 43,746,153 shares of the registrant’s common stock outstanding as of
      February 21, 2008.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant’s Proxy Statement for the 2008 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, 2007**





**TABLE
      OF CONTENTS**





**Page**SPECIAL
                CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
            1**PART
                I**ITEM
                1
            Business
            2ITEM
                1A
            Risk
                Factors
            24ITEM
                1B
            Unresolved
                Staff Comments
            34ITEM
                2
            Properties
            34ITEM
                3
            Legal
                Proceedings
            34ITEM
                4
            Submission
                of Matters to a Vote of Security Holders
            35**PART
                II**ITEM
                5
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            35ITEM
                6
            Selected
                Financial Data
            38ITEM
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            39ITEM
                7A
            Quantitative
                and Qualitative Disclosure About Market Risk
            49ITEM
                8
            Financial
                Statements and Supplementary Data
            49ITEM
                9
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosures
            50ITEM
                9A
            Controls
                and Procedures
            50ITEM
                9B
            Other
                Information
            50**PART
                III**ITEM
                10
            Directors,
                Executive Officers and Corporate Governance
            50ITEM
                11
            Executive
                Compensation
            50ITEM
                12
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            50ITEM
                13
            Certain
                Relationships and Related Transactions and Director
                Independence
            51ITEM
                14
            Principal
                Accountant Fees and Services
            51**PART
                IV**ITEM
                15
            Exhibits
                and Financial Statement Schedules
            52





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(sulodexide), ZerenexTM(ferric citrate), KRX-0401 (perifosine), 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 3 and Phase 4 clinical program under
      a
      Special Protocol Assessment, or SPA, with the Food & Drug Administration, or
      FDA. Additionally, we are developing ZerenexTM (ferric citrate), an oral,
      iron-based compound that has the capacity to bind to phosphate and form
      non-absorbable complexes. Zerenex is currently in Phase 2 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 (perifosine), a novel, potentially
      first-in-class, oral anti-cancer agent that modulates Akt, a protein in the
      body
      associated with tumor survival and growth. KRX-0401 also modulates 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 2 clinical
      development for multiple tumor types and we expect to move into a Phase 3
      clinical program in 2008. 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 product sales 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
                (sulodexide)
            Diabetic
                nephropathy
            Phase
                3 & Phase 4ZerenexTM
                (ferric citrate)
            Hyperphosphatemia
                in patients withend-stage
                renal disease
            Phase
                2***Oncology***KRX-0401
                (perifosine)
            Renal
                cancer and other multiple forms ofcancer
            Phase
                2KRX-0402
                (O6-benzylguanine)
                or (O6-BG)
            Brain
                cancer
            Phase
                2KRX-0601
                (7-hydroxystaurosporine)
            Multiple
                forms of cancer
            Phase
                2KRX-0404
                (ErPC)
            Multiple
                forms of cancer
            Pre-clinical***Neurology***KRX-0701
                (dexlipotam)
            Diabetic
                neuropathy
            Phase
                2KRX-0501
            Neurological
                disorders
            Phase
                1





**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 maximum shareholder
                value.


2


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





●
            complete
                the analysis of our pivotal Phase 3 trial and continue our Phase
                4 program
                for Sulonex;





●
            prepare
                a New Drug Application for Sulonex (sulodexide) for filing with the
                FDA;





●
            if
                we meet the primary objective of our pivotal Phase 3 trial for Sulonex,
                develop the commercial infrastructure required to manufacture, market
                and
                sell our drug candidates following approval, if any, by the
                FDA;





●
            launch
                a Phase 3 study for KRX-0401 (perifosine) in patients with advanced
                renal
                cell carcinoma;





●
            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, KRX-0501, KRX-0601
                and
                KRX-0701; 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* (sulodexide)





*Overview*





Our
      lead
      compound under development is Sulonex (sulodexide), which we previously referred
      to as KRX-101. We own the exclusive rights to develop, market and sell 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 observed in several clinical trials conducted in Europe and the
      U.S., including two randomized, double-blind, placebo-controlled Phase 2
      studies, that Sulonex can reduce urinary protein excretion in patients with
      diabetic nephropathy. Sulonex is in a pivotal Phase 3 and Phase 4 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. The Phase 3 trial was completed in the first quarter
      of
      2008.





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


3




*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. Capoten® (captopril), an Angiotension
      Converting Enzyme inhibitor (ACE), and Avapro® (irbesartan) and Cozaar®
(losartan), Angiotension Receptor Blockers (ARBs), are the only prescription
      pharmaceutical therapies currently approved to treat diabetic nephropathy in
      the
      United States. Despite treatment with these medications, progression of diabetic
      nephropathy continues in a significant percentage of patients reflecting an
      unmet medical need.





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.





*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, the
      precursor of what will eventually be excreted as urine, flows into the next
      serial component, which is 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. Since the negative
                charge
                of the glycosaminoglycan components is believed to provide selectivity
                to
                the filtration process by the glomerular membranes, this 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 the accumulation of Type IV collagen
                resulting in 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.


4


*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.





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 2 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
      versus placebo. 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
      U.S.-based pilot Phase 2 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. In June 2007, at the American
      Diabetes Association Annual Meeting, the CSG presented, in a poster
      presentation, the final Phase 2 data from the U.S.-based pilot Phase 2
      multi-center clinical study. Most recently, the results of the study were
      published in *Nephrology
      Dialysis Transplantation* in
      December, 2007. The design and results of the study are discussed
      below.





*Design
      of the Phase 2 Study*





The
      Phase
      2 study was designed as a pilot for the fully-powered pivotal SUN-MICRO Phase
      3
      study. In this Phase 2 study, two doses of Sulonex (200 mg and 400 mg) were
      compared to placebo in diabetic patients with persistent microalbuminuria on
      therapy with the maximum approved or tolerated dose of an ACE, or 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 2 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 3 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).


5




*Phase
      2 Study Results*





A
      total
      of 149 patients were randomized into one of three groups (47 patients to
      placebo, 50 patients to 200 mg/day of sulodexide, and 52 patients to 400 mg/day
      of sulodexide) and administered study medication (All-Patient Treated Group).
      Out of the 149 patients in the All-Patient Treated Group (APT), 130 patients
      were included in the Intent-to-Treat (ITT) analysis at the end of the treatment
      period (six months). Nineteen patients were excluded from the ITT analysis
      due
      to the presence of a urinary tract infection and/or a missing baseline urinary
      albumin creatinine ratio (uACR) data.





The
      results for the primary composite endpoint of “Therapeutic Success” (defined as
      normalization with a 25% reduction in the urinary albumin creatinine ratio
      or a
      50% reduction in the urinary albumin creatinine ratio) for the ITT group at
      six
      months (end of treatment phase) is shown in the table below:





Table
      1—Percent of Patients Achieving Therapeutic Success 6 Months (End of
      Treatment)





Placebo
            
            200
                mg/daysulodexide
            
            400
                mg/daysulodexideNumber
                of Patients
            
            
            39
            
            
            42
            
            
            49Number
                of Patients with Therapeutic Success at 6 Months
            
            
            6
            
            
            14
            
            
            9Proportion
                or Percentage
            
            
            15.4%
            
            
            33.3%
            
            
            18.4%95%
                Confidence Interval
            
            
            6%
                - 31%
            
            
            20%
                - 50%
            
            
            9%
                - 32%





The
      Phase
      2 trial was not powered to obtain definitive results for efficacy. However,
      observed trends were consistent with the hypothesis that administration of
      sulodexide (at 200 mg/day) is associated with a decreased urine albumin
      excretion in the patient population studied (table 2 below) and an increase
      in
      the number of patients achieving Therapeutic Success, defined as the achievement
      of normoalbuminuria or 50% decrease in albuminuria, and that effect appeared
      to
      be maintained for two months after cessation of therapy (table 4 below).





Table
      2—Trend for Increased Rate of Therapeutic Success 1





Treatment
                Comparison
            
            Outcome
            
            %
                of
              Outcome
              Placebo
            
            %
                of
              Outcome
              200
                mg/day
            
            Odds
                Ratio
            
            p
                Values200
                mg/day vs. Placebo
            
            
            Normalization
            
            
            7.7
            %
            
            16.7
            %
            
            2.40
            
            
            0.315200
                mg/day vs. Placebo
            
            
            50%
                Reduction
            
            
            12.8
            %
            
            28.6
            %
            
            2.72
            
            
            0.105200
                mg/day vs. Placebo
            
            
            Therapeutic
                Success
            
            
            15.4
            %
            
            33.3
            %
            
            2.75
            
            
            0.075







(1)
      95%
      confidence interval for therapeutic success at six month for the Odds ratio
      was
      0.84 to 9.83.





Table
      3—Mean Albumin to Creatinine Ratio over Time





Treatment
                Group
            
            Baseline
            
            2-Month
            
            4-Month
            
            6-Month
              (End
                of
              Treatment)
            
            Post-
              TreatmentPlacebo
                (n=39)
            
            
            73
            
            
            70
            
            
            78
            
            
            85
            
            
            87200
                mg/day (n=42)
            
            
            74
            
            
            58
            
            
            65
            
            
            57
            
            
            66400
                mg/day (n=49)
            
            
            67
            
            
            70
            
            
            67
            
            
            73
            
            
            74





Table
      4—Percent of Patients Achieving Therapeutic Success at Eight Months (Two Months
      Post-Treatment)





Placebo
              n=38
            
            200
                mg/daysulodexide
              n=41
            
            400
                mg/daysulodexide
              n=46Proportion
                or Percentage
            
            
            7.9%
            
            
            22.0%
            
            
            13.0%95%
                Confidence Interval
            
            
            1.7%
                - 21.4%
            
            
            10.6%
                - 37.6%
            
            
            4.9%
                - 26.3%




6





The
      number of patients with at least one adverse event of any type, a serious
      adverse event or possibly related adverse event is shown in the table below.





Table
      5—Adverse Event Data





Any
                Adverse Event
            
            Serious
                Adverse Event
            
            Possibly Related Adverse EventTreatment
            
            N
            
            %
                ofPatients
            
            N
                ofEvents
            
            N
            
            %
                ofPatients
            
            N
                ofEvents
            
            N
            
            %
                ofPatients
            
            N
                ofEventsPlacebo
                (n=47)
            
            
            38
            
            
            81
            %
            
            102
            
            
            4
            
            
            9
            %
            
            4
            
            
            5
            
            
            11
            %
            
            9200
                mg/d (n=50)
            
            
            46
            
            
            92
            %
            
            174
            
            
            16
            
            
            36
            %
            
            20
            
            
            7
            
            
            14
            %
            
            11400
                mg/d (n=52)
            
            
            42
            
            
            81
            %
            
            114
            
            
            4
            
            
            10
            %
            
            4
            
            
            11
            
            
            21
            %
            
            14





During
      this study, the following coagulation parameters were assessed prior to dosing
      (baseline) and at the end of treatment (6-month): fibrinogen, APTT, INR ratio,
      and prothrombin time (PT). There were no significant changes in the coagulation
      parameters for placebo, 200 mg/day of sulodexide and 400 mg/day of sulodexide
      when comparing mean endpoint values to mean baseline values for the parameters
      assessed.





*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, which allows for
      the use of surrogate endpoints in Phase 3 trials to support the approval of
      an
      NDA with confirmatory studies completed post-approval, could greatly reduce
      the
      development time to market.





In
      the
      third quarter of 2003, we announced that the CSG would conduct the U.S.-based
      Phase 2/3 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 2 portion of our Phase 2/3
      clinical program for Sulonex, and in the third quarter of 2004, we completed
      the
      target enrollment for the Phase 2 portion of the clinical program. The results
      of the Phase 2 are presented above under the caption “Phase 2 Study Results.”





In
      January 2005, we announced that the CSG recommended that we proceed to the
      Phase
      3 portion of our Phase 2/3 clinical program of Sulonex. This recommendation
      was
      based on the completion, by an independent Data Safety Monitoring Committee,
      or
      DSMC, on January 4, 2005, of a safety evaluation of the first interim analysis
      from the 149 patient, randomized, double-blind, placebo-controlled Phase 2
      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 3 and Phase 4 clinical trials of Sulonex.





In
      June
      2005, we announced the initiation of our pivotal Phase 3 and Phase 4 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 3 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 4 confirmatory study that
      will measure clinical outcomes in patients with overt nephropathy, or
      macroalbuminuria. The Phase 3 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
      4 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 3
      and
      Phase 4 clinical program of Sulonex for the treatment of diabetic
      nephropathy.


7




In
      November 2005, we announced final results from our Phase 2 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 2 study
      is
      discussed above under “U.S.- based Clinical Data.” In June 2007, final results
      from this study were the subject of a poster presentation at the American
      Diabetes Association meeting.





In
      November 2006, we announced that the DSMC responsible for monitoring Sulonex
      in
      the Phase 3 microalbuminuria and Phase 4 macroalbuminuria studies 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 3 clinical trial.





In
      March
      2007, we announced that the DSMC responsible for monitoring Sulonex in the
      Phase
      3 microalbuminuria and Phase 4 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.





In
      June
      2007, we announced the randomization of the last patient in our pivotal Phase
      3
      clinical trial of Sulonex for the treatment of diabetic nephropathy, concluding
      randomization with a total of 1,056 randomized patients worldwide.





In
      December 2007, we announced that the DSMC responsible for monitoring Sulonex
      in
      the Phase 3 microalbuminuria and Phase 4 macroalbuminuria studies met to
      evaluate the data from the ongoing Phase 3 trial. Following a complete review
      of
      all available safety and efficacy data, the DSMC found no cogent reason to
      recommend alteration or termination of the Phase 3 trial. The DSMC raised no
      safety concerns regarding Sulonex or the trial.





In
      the
      first quarter of 2008, the Phase 3 trial was completed. Assuming a positive
      outcome from our Phase 3 trial, we are targeting an NDA filing for Sulonex
      (sulodexide) by the end of 2008.





The
      ultimate clinical timeline, and consequent cost, for further development of
      Sulonex will depend, in part, on the successful completion and outcomes of
      our
      Phase 3/4 trials, and ultimate approval, if any, by the FDA.





***Zerenex*** *TM
      (ferric citrate)*





*Overview*





Zerenex
      (ferric citrate) is an oral, iron-based compound that has the capacity to bind
      to phosphate and form non-absorbable complexes. Zerenex is currently in Phase
      2
      clinical development for the treatment of hyperphosphatemia (elevated serum
      phosphorous levels) in patients with ESRD.





*Market
      Opportunity*





In
      the
      U.S., according to data from the U.S. Renal Data System, there are approximately
      485,000 patients with end-stage renal disease, or ESRD, and the number of ESRD
      patients is projected to rise 60% to approximately 785,000 by 2020. The vast
      majority of ESRD patients, over 350,000, require dialysis. 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 require 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 this type of binder a viable treatment option.


8




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.





Non-calcium-based,
      non-absorbed phosphate binders, including sevelamer hydrochloride and sevelamer
      carbonate are among the most prescribed phosphate binders in the U.S. Compared
      to the calcium-type binders, fewer coronary and aortic calcifications have
      been
      documented, however, there is a risk of metabolic acidosis with sevelamer
      hydrochloride, the potential for gastrointestinal problems, and sevelamer can
      affect concomitant vitamin K and vitamin D treatment.





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, particularly in bone and liver, has been observed in animals.
      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 has long been recognized, especially
      given the increasing prevalence of ESRD as well as shortcomings with current
      therapies. Zerenex has the potential to be an effective and safe treatment
      in
      lowering and/or maintaining 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 2 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 2 study was conducted under an IND sponsored by our
      licensors in both the United States and Taiwan.





From
      this
      Phase 2 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 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
      2 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.





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)


9


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 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, Zerenex has been studied in two previous Phase 2 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 appeared to
      be generally comparable to calcium-based products which were used as positive
      control arms in those studies. The study was not designed to compare Zerenex
      to
      calcium-based products, therefore, no formal assessment can be made of the
      comparative efficacy. 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
                PhosphorousBaseline
                (mg/dL)
            
            End-Point
              (Four
                Weeks) (mg/dL)
            
            Change
              from
                BaselineFerric
                Citrate
              (ZerenexTM)
                (4.5 g/day)
            
            
            7.2
                +/- 2.5
            
            
            5.9
                +/- 2.0
            
            
            P<0.005Calcium
                Acetate
              (PhosLo®)
                (4 g/day)(1)
            
            
            7.2
                +/- 2.0
            
            
            5.6
                +/- 1.7
            
            
            P<0.005




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





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





Open
      Label, Randomized, Crossover, 2 sites





Serum
                PhosphorousBaseline
                (mg/dL)
            
            End-Point
              (Four
                Weeks) (mg/dL)
            
            Change
              from
                BaselineFerric
                Citrate
              (ZerenexTM)
                (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 the further development of Zerenex,
        including Phase 3 study design and requirements prior to moving into Phase
        3. To
        support higher doses and longer duration of treatment in Phase 3, 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.
 
 In
        August
        2007, we provided the FDA with our 28-day toxicology package for rats and
        dogs.
        The FDA accepted our 28-day toxicology package and we plan to commence a
        Phase 2
        high-dose exposure clinical trial in the first quarter of 2008. In addition
        to
        the 28-day toxicology study, we are conducting a 90-day toxicology study
        in rats
        and a 16-week toxicology study in dogs. This will assist the Company in
        designing the chronic toxicity studies. Initiation of the shorter-term,
        high-dose tolerance and safety clinical trial is expected in the first quarter
        of 2008.




**Oncology**





***KRX-0401
      (perifosine)***





*Overview*





We
      are
      also developing KRX-0401 (perifosine), which is a novel, potentially
      first-in-class, oral anti-cancer agent that modulates 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. The effects of perifosine on Akt are of
      particular interest because of the importance of this pathway in the development
      of most cancers, the evidence that it is often activated in tumors that are
      resistant to other forms of anticancer therapy, and the difficulty encountered
      thus far in the discovery of drugs that will inhibit this pathway without
      causing excessive toxicity. 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. Published data suggest
      that the Akt pathway is frequently activated in renal cell cancer and that
      this
      tumor type may be particularly responsive to Akt inhibition.


To
      date,
      over 1,700 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 lower doses that have induced tumor
      regression. Responses have been seen with both daily and weekly regimens. At
      the
      doses studied, the daily regimens were better tolerated.





In
      Phase
      1/2 trials, KRX-0401 has induced tumor regressions and/or caused disease
      stabilization in a variety of tumor types. KRX-0401 has shown single agent
      partial responses in renal cell and hepatocellular carcinoma, soft tissue
      sarcoma, GIST tumors, mesothelioma, and carcinoma of the appendix. There is
      also
      evidence of activity in hematological malignancies, especially multiple myeloma.
      Disease stabilization, defined as time on treatment without progression for
      at
      least 6 months has been seen in 20 tumor types, including metastatic renal
      cell cancer, hepatocellular carcinoma, melanoma, carcinoid, prostate, head
      and
      neck, breast, and small cell lung cancer. Responding patients, including stable
      disease, have been treated for various durations up 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. Investigators at the US National Cancer Institute, or NCI, were
      among the first to study the effects of KRX-0401 on Akt using a prostate cell
      line, PC-3 that is known to have constitutively activated Akt. Their results
      demonstrated that KRX-0401 blocked phosphorylation of Akt but did not decrease
      the total amount of Akt present in the cell. In model systems the drug appears
      to be synergistic with radiotherapy and additive or synergistic with cytotoxics
      such as cisplatin, doxorubicin, and cyclophosphamide. In these experiments,
      the
      combination regimens were superior to chemotherapy alone and were well
      tolerated. Recent data suggest that KRX-0401 may be additive or synergistic
      with
      newer targeted agents such as tyrosine kinase inhibitors sorafenib
      (Nexavar ® )
      and
      sunitinib (Sutent ® ).





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. Investigators at the Dana-Farber Cancer Institute demonstrated
      that
      it is synergistic when combined with bortezomib (Velcade ® ),
      dexamethasone and a number of other drugs used to treat multiple myeloma. In
      these experiments, treatment with bortezomib alone inhibited phosphorylation
      of
      ERK while increasing Akt activation. KRX-0401 inhibited phosphorylation of
      Akt
      while increasing ERK activation. The two drugs together inhibited
      phosphorylation of both Akt and ERK, and these effects correlated with the
      increased efficacy of the combination.




Seven
      Phase 1 single agent studies of KRX-0401 have been completed, three in Europe
      by
      Zentaris and four in the United States by the 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 1 studies was gastrointestinal: nausea, vomiting and diarrhea. In
      addition, some patients experienced fatigue, especially with prolonged
      administration. In these Phase 1 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, 22 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 (3), ovarian cancer (1),
      salivary gland cancer (1), mesothelioma (2) and hepatoma (2). The meaning of
      disease stabilization in an individual patient in a Phase 1 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
      1
      data provides clinical evidence of the anti-cancer effects of KRX-0401.


10
 Five
      Phase 1/2 studies of KRX-0401 in combination with other drugs have been
      conducted by Keryx; another eight are ongoing. Other drugs that have been
      included in these combinations are gemcitabine, paclitaxel, docetaxel,
      prednisone, doxorubicin, capecitabine, pemetrexed, irinotecan, Doxil ®
      (doxorubicin HCl liposome injection) ,
      trastuzumab, various endocrine therapies, imatinib, bortezomib, sorafenib,
      and
      sunitinib. In general KRX-0401 has not added to the toxicities expected when
      these other drugs are used alone, and in general it has not been necessary
      to
      reduce the dose of either perifosine or the other drug in the combination.
      KRX-0401 has also been studied in combination with radiotherapy without evidence
      of increased toxicity.




The
      NCI
      has completed a number of Phase 2 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. Findings from these studies
      led most of these investigators to conclude that the drug was safe and
      well-tolerated at the Phase 2 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 (“continuous” regimen) or on days 2
      to 21 of a four-week cycle (“intermittent” regimen). 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 1 trials. However, studies using the “continuous” regimen appeared to
      be better tolerated than studies that used the “intermittent”
regimen.





In
      the
      NCI Phase 2 sarcoma study that utilized the “continuous” regimen, the
      investigators reported a partial response (greater than 50% decrease in tumor
      mass) as well as several disease stabilizations. No response was seen in the
      other NCI sarcoma trial in which the less well tolerated “intermittent” dose
      schedule was used. In the NCI Phase 2 breast cancer study, investigators scored
      three of 15 evaluable patients as having stable disease. One of these patients
      had measurable tumor regression that 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
      “intermittent” regimen. In one of the prostate cancer studies the “continuous”
regimen was given to patients with recurrent hormone-sensitive prostate cancer
      whose only manifestation of disease was an elevation of PSA. PSA levels fell
      in
      5 of 22 evaluable patients enrolled in this trial, but no PSA level fell by
      more
      than 50%. Twenty patients were considered by the investigators to have had
      disease stabilization. The median time to progression was 6.6 months, but one
      patient continued on treatment without further progression for 3.3 years. In
      other prostate cancer study the “intermittent” regimen was evaluated in patients
      with hormone-refractory disease that was more widespread. In this study there
      were no radiographic responses or PSA declines of 50% or greater, 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 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. None of the patients with head and neck or
      pancreatic cancers enrolled in these NCI trials responded.





A
      review
      from all completed and ongoing Phase 1 and Phase 2 studies demonstrated that
      KRX-0401 induced 21 partial responses in various malignancies including renal
      cell and hepatocellular carcinoma, soft tissue sarcoma, GIST tumors,
      mesothelioma, carcinoma of the appendix, and multiple myeloma. Disease
      stabilization, defined as time on treatment without progression for at least
      6
      months was seen in 20 tumor types, including metastatic renal cell cancer,
      hepatocellular carcinoma, soft tissue sarcoma, melanoma, carcinoid, prostate,
      head and neck, breast, and small cell lung cancer.





In
      June
      2006, we announced data of KRX-0401 in patients with advanced renal cell
      carcinoma (RCC). These patients were a cohort of a Phase 2, multi-center trial
      of KRX-0401 conducted by Keryx that included multiple tumor types. Patients
      were
      randomized to either a daily (50 mg or 100mg) or weekly (900mg or 1200mg) dose
      of KRX-0401. Although the study is ongoing, 416 patients had been enrolled
      at
      the time of the last analysis, and 24 of these had advanced RCC. All patients
      in
      this study were to have had prior standard therapy. Most patients had received
      two chemotherapy regimens for metastatic disease. In November 2007, updated
      data
      on the renal cancer patients enrolled in this trial were announced. The results
      are summarized in the table below. One of the four responding patients had
      previously failed to respond to both sorafenib and sunitinib.


Perifosine
        Efficacy in Renal Cell Cancer
  **Number
                  of Patients****All
                  Doses**
              
              **Lower
                  Doses**
                **50 or 100 mg Daily**
              
              **Higher
                  Doses**
                **900
                  or 1200 mg Weekly**Total
                  enrolled, all tumor types
              
              
              416
              
              
              205
              
              
              211Renal
                  Cell Cancers
              
              
              24
              
              
              12
              
              
              12Evaluable
                  for response*
              
              
              13
              
              
              7
              
              
              6Partial
                  response (RECIST)
              
              
              4
              
              
              2
              
              
              2Durations
                  of response (months)
              
              
              4,
                  7, 9, 12
              
              
              7,
                  12
              
              
              4,
                  9Stable
                  ≥ 6 months
              
              
              4
              
              
              3
              
              
              1Duration
                  stable disease (months)
              
              
              10,
                  13, 14, 18+
              
              
              10,
                  13, 14
              
              
              18+Response
                  rate†
              
              
              31%
              
              
              29%
              
              
              33%Clinical
                  benefit rate ††
              
              
              62%
              
              
              71%
              
              
              50%
   *
              Patients
                  with measurable disease on study for at least 2 months and at least
                  one
                  tumor measurement after initiation of
                  perifosine
 +
              Patient
                  had not yet progressed at the time of the
                  analysis
 *†*
              *RECIST
                  criteria*
 *††*
              *PR
                  or Stable for ≥6
                  months*


11


In
      a
      Phase 1 study of KRX-0401 combined with sorafenib, 18 patients with advanced
      cancers were enrolled in one of four cohorts. Ten of these patients had advanced
      renal cell carcinoma with some patients having received a prior tyrosine kinase
      inhibitor (sunitinib). No
      grade
      4 toxicities were reported and 1 grade 3 hand/foot syndrome has been seen.
      The
      combination has been generally well tolerated.





In
      June
      2007, an analysis of the response to perifosine of sarcoma patients enrolled
      in
      one of three Phase 1 or four Phase 2 trials that enrolled patients with soft
      sarcomas were presented at the American Society of Clinical Oncology meetings
      in
      Chicago. There were a total of 145 patients, 76 treated with one of 3 regimens
      defined retrospectively as being “lower doses” and 69 treated with “higher
      doses.” Only 82 patients were fully evaluable. The most common reason that
      patients were inevaluable is that they were removed from study for toxicity
      without evidence of tumor progression. This happened more often among patients
      treated with the higher doses. In addition, patients were considered inevaluable
      if they had rapid progression shortly after drugs was started (< 2 months)
      and before perifosine would have had much chance to work. The definition of
      clinical benefit rate (CBR) used in this analysis is identical to that used
      previously in an analysis of the effectiveness of mTOR inhibitors for patients
      with soft tissue sarcomas. The overall CBR in evaluable patients, 52%, was
      not
      significantly different in the two patient cohorts defined by the dose
      administered. The response rate in an intent-to-treat analysis was higher in
      patients treated with the lower doses because of the higher proportion of
      patients on the higher dose regimens who could not tolerate drug.




In
      December 2006 and again in December 2007, we reported results from a Phase
      2
      study of KRX-0401 alone and in combination with dexamethasone in patients with
      advanced relapsed and refractory multiple
      myeloma .
      Sixty-seven highly pre-treated multiple myeloma patients (median age 62 yrs)
      were treated with KRX-0401 at 150 mg qd to assess the single agent activity
      in
      this patient population. Patients had a median of 4 lines of prior therapy
      (range 1 - 11) and 94% of patients were previously treated with at least one
      course of dexamethasone. If a patient progressed on KRX-0401 alone,
      dexamethasone (20mg twice weekly) was added to their KRX-0401 regimen. Toxicity
      was manageable with no deep vein thrombosis or peripheral neuropathy reported.
      The most common grade 3/4 adverse events were nausea (8%); vomiting (5%);
      diarrhea (2%); fatigue (2%), neutropenia (17%), anemia (6%) and increased
      creatinine (8% in the context of PD and light chain nephropathy). Ten patients
      discontinued therapy due to an adverse event. Twenty-one patients had KRX-0401
      reduced from 150 to 100 mg qd with no difference in response noted.





In
      this
      heavily pre-treated and relapsed/refractory patient population, KRX-0401 as
      monotherapy was considered by the investigators to be active with 33 of 50
      evaluable patients (66%) achieving stable disease. (See table below)
      Dexamethasone was added in 39 of 55 pts with progressive disease. In 29 patients
      evaluable for response to the combination the overall response rate (CR+PR+MR)
      was 35% and 52% had disease stabilization. Enrollment objectives were met and
      the study is now closed.


Perifosine
      Efficacy in Multiple Myeloma





**Number
                (%)**
            
            **Duration of Response**
              **(Weeks)****Perifosine
                Alone**Evaluable
                for response
            
            
            50ResponseMR
            
            
            1(2%)
            
            
            24Stable
                Disease*
            
            
            33(66%)
            
            
            6
                - 45+ (median 10)**Perifosine
                + Dexamethasone**Evaluable
                for response
            
            
            29ResponsePR
            
            
            4(14%)
            
            
            36,
                39, 63+, 64+MR
            
            
            6
                (21%)
            
            
            15,
                18, 19, 28+, 30, 70Stable
                Disease*
            
            
            15(52%)
            
            
            6
                - 31 (median 14)





**Stable
      disease: <25% change in m-protein*


12


In
      December 2007 we announced the first results of a trial combining KRX-0401
      with
      bortezomib in patients with advanced multiple myeloma previously treated with
      bortezomib. This trial was designed as a Phase 1/2 study. The Phase 1 portion
      enrolled 18 patients (median age 64 yrs) with advanced multiple myeloma (83%
      relapsed and refractory) who were enrolled in one of four cohorts. Patients
      had
      a median of 5 lines of prior therapy and 100% of patients were previously
      treated with at least one course of therapy on bortezomib. KRX-0401 was
      escalated from 50 to 100 mg qd while bortezomib was escalated from 1.0 to 1.3
      mg/mm2. No dose- limiting toxicity and no grade 3 peripheral neuropathy were
      reported. Toxicities were generally easily managed and tolerated. Dexamethasone
      20mg (day of and day after each bortezomib dose) was added in patients with
      progressive disease on KRX-0401 plus bortezomib alone. Sixteen patients on
      either bortezomib plus KRX-0401 alone or with dexamethasone were evaluable
      for
      response, assessed by modified EBMT/Blade criteria. An overall response rate
      of
      56% (CR + PR + MR) was reported with an additional 31% of patients achieving
      stable disease. The Phase 2 portion of the study is currently open with KRX-0401
      50 mg daily + bortezomib 1.3 mg/m 2 ,
      on days
      1, 4, 8, 11 of a 21 day cycle. The investigators concluded that the combination
      of KRX-0401 and bortezomib (+/- dexamethasone) was well tolerated and is active
      in heavily pre-treated and relapsed/refractory multiple myeloma, including
      bortezomib- resistant patients.





*Development
      Status*





During
      the second quarter of 2004, we announced the initiation of a Phase 2 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 ®
      (doxorubicin HCl liposome injection) ,
      irinotecan, Herceptin® (trastuzumab) ,
      and
      endocrine therapy. We have also initiated an “all-comers” Phase 2 clinical trial
      evaluating KRX-0401 as a single-agent, administered either weekly or daily
      in a
      variety of tumor types. Preliminary results have been reported from many of
      these studies and are described above.





In
      December 2006, we announced the initiation of a corporate-sponsored Phase 2
      clinical program to evaluate KRX-0401 as a treatment for rare sarcomas. This
      Phase 2 study is being 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 2 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 are treated with
      KRX-0401 until disease progression. This study follows previous Phase 1 and
      Phase 2 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.


13





In
      December 2006, we announced the initiation of a multi-center Phase 1 clinical
      program to explore the convenient all-oral combination of KRX-0401,
      Revlimid ® and
      dexamethasone for the treatment of relapsed or refractory multiple myeloma.
      This
      trial will be completed in 2008. The results of these Phase 1/2 trials will
      determine the feasibility of initiating randomized trials in patients with
      multiple myeloma.





During
      2007 the Phase 1 portion of a Phase 1/2 trial evaluating the combination of
      perifosine with Velcade ® (bortezomib) was completed. The results are summarized above. Patients are
      now
      being enrolled in the Phase 2 component of this study.





During
      2007 four trials were initiated to evaluate perifosine alone or in combination
      for patients with advanced renal cell cancer. Two of these were Phase 2 studies
      of perifosine alone, either in patients resistant to the tyrosine kinase
      inhibitors (sorafenib or sunitinib) or in patients resistant to mTOR inhibitors.
      Two of these trials were Phase 1/2 studies of perifosine in combination with
      sorafenib or sunitinib. All four of these trials are still accruing patients
      and
      will continue throughout 2008. In addition, a randomized trial evaluating
      perifosine in patients with advanced renal cancer is planned for
      2008.





***KRX-0402***





KRX-0402
      (O 6 -benzylguanine
      or O 6 -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. To date, nearly 800 patients
      have
      received KRX-0402 in multiple clinical studies. Dose limiting toxicity for
      KRX-0402 in combination with chemotherapy is bone marrow suppression. KRX-0402
      alone has no identified dose limiting toxicity. We are currently assessing
      the
      future development prospects of KRX-0402.





***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 2 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 NCI. 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 are currently assessing the future development prospects of
      KRX-0601.





***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 are
      currently assessing the future development prospects of KRX-0404.





**Neurology**





***KRX-0501***





KRX-0501
      is an orally available small molecule in 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. In May 2007, we initiated a first-in-man Phase
      1
      study for KRX-0501, a nerve growth factor enhancer, in healthy volunteers to
      assess the pharmacokinetic profile.





KRX-0501
      was licensed from Krenitsky Pharmaceuticals, Inc. in 2005 and we hold a
      worldwide license to develop and sell the product for all
      indications. KRX-0501 is believed to have potential for use in the
      treatment of neurological conditions such as diabetic neuropathic pain,
      Huntington and Alzheimer’s disease, as well as chemotherapy-induced
      neuropathy.


14


***KRX-0701***





KRX-0701
      (dexlipotam) or (tromethamine-salt of R (+)-α-lipoic
      a cid)
      is a
      compound being investigated for the treatment of diabetic neuropathy and
      possibly other neuropathic conditions. Currently, there is an Investigational
      New Drug Application for KRX-0701 in the United States and we are planning
      to
      initiate a Phase 2 dose-ranging study in 2008 for diabetic neuropathy. KRX-0701
      is considered to be an antioxidant and can normalize the cell redox imbalance
      that occurs in diabetes.





During
      the first half of 2007, we acquired an exclusive worldwide license to KRX-0701
      from Degussa AG, a wholly owned subsidiary of the RAG Group based in Germany.
      In
      accordance with the terms of the agreement, we made an up-front payment and
      will
      make milestone payments as well as pay royalties on product sales.





The
      Company plans to enter into a Phase 2 study in the second half of
      2008.





**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 “Risks Associated with Our Product
      Development Efforts.”





**Product
                candidate**
            **Targetindication**
            **Developmentstatus**
            **Completion**
              **of
                phase**
            **Estimated
                costto complete phase*****Endocrine/Renal***SulonexTM
                (sulodexide)
            Diabetic
                nephropathy
            Phase
                3
            1stQtr. 2008
            Approximately
              $3
                millionPhase
                4
            Not
                estimable
            Not
                estimableZerenexTM
                (ferric citrate)
            Hyperphosphatemia
                in
              patientswith
                end-stage
              renal
                disease
            Phase
                2
            Late
                2008 /
              Early
                2009
            Approximately
              $6
                million***Oncology***KRX-0401
                (perifosine)
            Renal
                cancer and other multipleforms of cancer
            Phase
                2
            Not
                estimable
            Not
                estimableKRX-0402
              (O6-benzylguanine)
                or(O6-BG)
            Brain
                cancer
            Phase
                2
            Not
                estimable
            Not
                estimableKRX-0601
              (7-hydroxystaurosporine)
            Multiple
                forms of cancer
            Phase
                2
            Not
                estimable
            Not
                estimableKRX-0404
                (ErPC)
            Multiple
                forms of cancer
            Pre-clinical
            Not
                estimable
            Not
                estimable***Neurology***KRX-0701
                (dexlipotam)
            Diabetic
                neuropathy
            Phase
                2
            Not
                estimable
            Not
                estimableKRX-0501
            Neurological
                disorders
            Phase
                1
            2009
            Approximately
              $2
                million





Completion
      dates and costs in the above table are estimates due to the uncertainties
      associated with clinical trials and the related requirements of development.
      In
      cases where the requirements for clinical trials and development programs have
      not been fully defined, or are dependent on the success of other trials, we
      cannot estimate trial completion or cost with any certainty. The
      actual spending on each trial during the year is also dependent on funding.
      We
      therefore direct your attention to Item 7 under the heading Liquidity and
      Capital Resources.








**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, supported by regulatory data
      exclusivity 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 of the
      pending patent applications will issue as patents.


15




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
      (sulodexide)***





Pursuant
      to our license for sulodexide, 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 sulodexide 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.





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.





U.S.
      Patent No. 7,259,152 covers the use of oral formulations of sulodexide for
      the
      treatment of diabetic nephropathy in patients with both insulin dependent and
      non-insulin dependent diabetes mellitus. This patent expires in 2020.





***Other
      Clinical-Stage Compounds, including
      KRX-0401(perifosine)***





Pursuant
      to our acquisition of ACCESS Oncology, Inc. 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 perifosine. 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 (O 6 -benzylguanine)
      expiring in 2010 (with extension expected through 2015).


16




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 expired
      in June 2007. The method of use patents expire from 2013 to 2017.





Pursuant
      to our license for Zerenex (ferric citrate) 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 ferric citrate.
      Panion holds one use patent expiring 2017 (with extensions expected through
      2020) and two manufacturing process patents (expiring 2023). We are continuing
      to research additional uses for this compound and anticipate filing additional
      patent applications in the future.





***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 or other
      provisions of the Food, Drug and Cosmetic Act to provide market exclusivity
      for
      certain of our drug candidates. Orphan drug regulations 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 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.





***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 required 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. See
      “Item 3. Legal Proceedings” for additional information.





***Collaborative
      Study Group***





In
      June
      2005, we announced that the CSG will be conducting our pivotal Phase 3 and
      Phase
      4 clinical program of sulodexide 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.


17




***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
      for a
      period of twelve years from the date of the first commercial sale of the
      product.





***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
      perifosine covering
      composition of matter and methods of treatment. This
      agreement grants us the exclusive rights to perifosine (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., a wholly owned subsidiary of Paligent, Inc.,
      relating to the development and marketing of KRX-0402 (O 6 -benzylguanine).
      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 ferric
      citrate (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. See “Item 3. Legal Proceedings”
for additional information.





***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.





***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.





***Degussa
      AG***





During
      the first half of 2007, we acquired an exclusive worldwide license to KRX-0701
      from Degussa AG, a wholly owned subsidiary of the RAG Group based in Germany.
      In
      accordance with the terms of the agreement, we made an up-front payment and
      will
      make milestone payments as well as pay royalties on product sales.





***Japan
      Tobacco Inc. and Torii Pharmaceutical Co., Ltd.***





In
      September 2007, we entered into a sublicense agreement with Japan Tobacco Inc.
      (“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”), JT's pharmaceutical
      business subsidiary, under which JT and Torii obtained the exclusive rights
      for
      the development and commercialization of Zerenex (ferric citrate) in Japan.
      The
      licensing arrangement calls for JT and Torii to pay us up to $100 million in
      up-front license fees and payments upon the achievement of pre-specified
      milestones, including up to $20 million in up-front payments and near-term
      milestones, of which Keryx received $12 million in October 2007. In addition,
      upon commercialization, JT and Torii will make royalty payments to Keryx on
      net
      sales of ferric citrate in Japan. JT and Torii will be responsible for the
      future development and commercialization costs in Japan.


18




**COMPETITION**





Competition
      in the pharmaceutical and biotechnology industries is intense. 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. 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 Scientific Protein
        Laboratories, LLC, or SPL, a U.S.-based contract manufacturer, to manufacture
        Sulonex which we believe will be adequate to satisfy our current clinical
        trial
        and early commercial market needs. Manufacture will be conducted in a
        manufacturing suite built within their current facility by Keryx, 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. This new manufacturing suite has been completed and facility validation
        is in progress, with expected completion in 2008. As with all heparin-like
        compounds, the end product is sensitive to the manufacturing process utilized
        and 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. We have incurred,
        and
        will continue to incur, capital expenditures to enable this larger scale
        production. To date, we have spent $11.2 million in capital expenditures
        to
        build the current manufacturing suite.
 
 As
        we
        move forward, we plan to build additional manufacturing capacity to meet
        the
        future demands for Sulonex and create back-up manufacturing capabilities.





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, or safety issues associated with
      heparin products, generally, or specifically associated with heparin
      manufactured by our suppliers, including SPL, 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. Supply of heparin from China is important
      to
      all participants in the heparin business and, therefore, we are following
      closely the evaluations of applicable controls and regulations in China. We
      believe the long term results of this added scrutiny will be beneficial both
      to
      the heparin industry in general, and to patients in particular, resulting in
      an
      even higher level of quality assurance. Accordingly, we will continue to monitor
      this situation closely to determine its impact, if any, on Keryx and
      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.


19




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





At
      the
      time of commercial sale, to the extent possible and commercially practicable,
      we
      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 and 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.




20




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





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





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





In
      March
      2005, we announced that we had finalized a SPA with the FDA for the Phase 3
      and
      Phase 4 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 3 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 4 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 3 trial, our Phase 4 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
                1*:
                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
                2*:
                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
                3*:
                Studies establish safety and efficacy in an expanded patient population.




·
            *Phase
                4*:
                The FDA may require Phase 4 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.




21




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




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




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




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




·
            insufficient
                supply of the drug candidates;




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




·
            ineffectiveness
                of the drug candidates.




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





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





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





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. Drugs approved under Subpart H carry
      additional restrictions on marketing activities, including the requirement
      that
      all promotional materials to be used in support of the product are pre-submitted
      to 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.


22





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.





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 $24,182,000 in 2005,
      $56,139,000 in 2006, and $74,889,000 in 2007. “Other research and development
      expenses” consist primarily of salaries and related personnel costs, fees paid
      to consultants and outside service providers for clinical and laboratory
      development, facilities-related and other expenses relating to the design,
      development, testing, and enhancement of our product candidates and
      technologies, as well as expenses related to in-licensing of new product
      candidates. See “Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations—Overview.”





**EMPLOYEES**





As
      of
      February 22, 2008, we had 50 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.


23


**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, 2007, we had an accumulated deficit of
      approximately $278.3 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, and the rate we collect, clean, lock and analyze
      the clinical trial database. 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 3 and Phase 4
      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 3 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 4 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. Many companies who
      have been granted an SPA and/or the right to utilize an accelerated approval
      approach have failed to obtain approval. Since we are seeking accelerated
      approval under an SPA, we may be subject to enhanced scrutiny. Additionally,
      even if the primary endpoint is achieved, an SPA does not guarantee approval.
      The FDA may raise issues of safety, study conduct, changes in scientific or
      medical evidence or sentiment or internal inconsistency in the data prior to
      making their final decision. The FDA may also seek the guidance of an advisory
      panel prior to making their final decision. In addition, the FDA will have
      access to, and will review, the safety database for our Phase 4 clinical trial
      prior to granting approval. Any concerns arising from that review could delay
      or
      prevent the approval of Sulonex. If the FDA approves Sulonex for marketing
      on
      the basis of our Phase 3 trial, our Phase 4 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. 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.


24





Additionally,
      we have never filed an NDA or similar application for approval in the United
      States or in any country, which may result in a delay in, or the rejection
      of,
      our filing of an NDA or similar application. During the drug development
      process, regulatory agencies will typically ask questions of drug sponsors.
      While we endeavor to answer all such questions in a timely fashion, or in the
      NDA filing, some questions may not be answered by the time we file our NDA.
      Unless the FDA waives the requirement to answer any such unanswered questions,
      our NDA may be delayed or rejected. For example, with respect to Sulonex, during
      the development process, the FDA has raised certain non-clinical questions.
      To
      answer some of these questions requires a bioassay for which the analytical
      tools do not currently exist. The FDA has requested that we diligently pursue
      such an assay. We believe that we have diligently pursued, and will continue
      to
      diligently pursue, such an assay. If the FDA determines that we have not been
      diligent, or otherwise determines that our NDA fails to answer required
      questions, then our NDA could be delayed or rejected. In addition, NDA approval
      can be delayed or denied due to unanswered questions relating to chemistry,
      manufacturing and controls. Our ability to resolve any such open questions
      might
      be complicated by the recent investigations into heparin manufacturing in China.
      All of those factors could affect the filing or ultimate approvability of
      Sulonex. Failure to obtain approval on a timely basis, or at all, would have
      a
      material adverse effect on us.





***Pre-clinical
      testing and clinical development are long, expensive and uncertain processes.
      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 3 study will track the data from the pilot
      Collaborative Study Group Phase 2 study or the DiNAS Phase 2 study, or that
      the
      results from the Sulonex Phase 4 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 and efficacy data of Sulonex, or our other
      drug candidates, may be flawed and there can be no assurance that safety and/or
      efficacy 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 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 what appeared to be 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. While we have engaged
      a
      clinical research organization with experience in conducting regulatory trials,
      errors in the conduct, monitoring and/or auditing could invalidate the results
      from a regulatory perspective.





***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 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.


25





***We
      rely on third parties to manufacture and test our products. If these third
      parties do not successfully manufacture and test 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 and test our products for use in clinical trials and for future
      sales. We may not be able to enter into future contract agreements with these
      third-parties on terms acceptable 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 and unannounced inspections by the FDA
      and
      corresponding foreign governmental agencies to ensure strict compliance with
      current Good Manufacturing Practices as well as other
      governmental regulations and corresponding foreign standards. The same issues
      apply to contract analytical services which we use for testing of our
      products. We will not have control over, other than by contract and periodic
      oversight, third-party manufacturers' compliance with these regulations and
      standards. Switching or engaging multiple third-party contractors to produce
      our
      products may be difficult because the number of potential manufacturers is
      limited, particularly in the case of Sulonex, and the process by which multiple
      manufacturers make the drug substance must be identical at each manufacturing
      facility. It may be difficult for us to find and engage replacement or multiple
      manufacturers quickly and on terms acceptable to us, if at all. Moreover, if
      we
      need to change manufacturers, the FDA and corresponding foreign regulatory
      agencies must approve these manufacturers in advance, which will involve testing
      and additional inspections to ensure compliance with FDA and foreign regulations
      and standards.




***If
        third-party manufacturers fail to deliver the required quantities of our
        drug
        candidates on a timely basis and at commercially reasonable prices, we will
        not
        be able to commercialize our products as planned.***
 
 We
        have
        entered into a relationship with SPL, a U.S.-based contract manufacturer,
        to
        manufacture Sulonex which we believe will be adequate to satisfy our current
        clinical trial and early commercial market needs. Manufacture will be conducted
        in a manufacturing suite built within their current facility by Keryx, 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. This new manufacturing suite has been completed and facility validation
        is in progress, with expected completion in 2008. As we move forward, we
        plan to
        build additional manufacturing capacity to meet the future demands for Sulonex
        and create back-up manufacturing capabilities. As with all heparin-like
        compounds, the end product is 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. In
        addition, because we do not have a bioassay for Sulonex, we may have difficulty
        qualifying materials from multiple sources, including materials produced
        from
        our larger scale facility and/or from additional facilities, which could
        delay
        or impair our commercialization efforts. We have incurred, and will continue
        to
        incur, capital expenditures to develop commercial production capacity. Through
        December 31, 2007, we have spent approximately $11.2 million in capital
        expenditures building the current manufacturing suite. If we fail to obtain
        regulatory approval for Sulonex, we may incur significant losses disposing
        of
        the assets associated with our 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 factors over which
      we have no control, for example, limitations in the supply of porcine mucosa
      and
      the demand for other heparin products. 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. D iseases
      affecting the world supply of pigs, or safety issues associated with heparin
      products, generally, or specifically associated with heparin manufactured by
      our
      suppliers, including SPL, could also have an actual or perceived negative impact
      on our ability, or the ability of our contract manufacturers, to source, make
      and/or sell Sulonex. Supply of heparin from China is important to all
      participants in the heparin business and, therefore, we are following closely
      the investigations into applicable controls and regulations in China to
      determine its impact, if any, on Keryx and Sulonex, or on our supplier,
      SPL, which, in turn, could have an adverse effect on us. If these investigations
      result in a reduction in the amount of porcine mucosa available from China,
      or
      any significant delay in obtaining those supplies, it could adversely affect
      the
      commercial success of Sulonex.


26





***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
      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. Additionally, if
      these third parties fail to perform their obligations under our agreements
      with
      them or fail to perform their work in a satisfactory manner, in spite of our
      efforts to monitor and ensure the quality of such work, we may face delays
      in
      achieving the regulatory milestones required for commercialization of one or
      more drug candidates.





***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.





**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 limited 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.


27





Notwithstanding
      our current plans to commercialize Sulonex and our other drug candidates, from
      time to time we may consider offers or hold discussions with companies for
      partnerships or the acquisition of our company or any of our products. Any
      accepted offer may preclude us from the execution of our current business
      plan.





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





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





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





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





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





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





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





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





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





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





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





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





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





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





As
      of
      February 22, 2008, we had 50 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.


28





***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.





***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.


29





***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
      50
      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.


30


**Risks
      Related to Our Financial Condition**





***Our
      current cash, cash equivalents, interest receivable and investment securities
      may not be adequate to support our operations for the length of time that we
      have estimated.***





We
      believe that our $64.7 million in cash, cash equivalents, interest receivable
      and investment securities as of December 31, 2007 will be sufficient to enable
      us to meet our planned operating needs and capital expenditures through the
      date
      of the release of our Phase 3 Sulonex data, expected in the first quarter of
      2008. Depending on the outcome of our Phase 3 study, our cash requirements
      will
      vary dramatically. In the event of a negative outcome, we believe our current
      capital resources will enable us to meet our revised operating needs and capital
      expenditures for at least 12 months from January 2008. 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.





As
      of
      February 22, 2008, $12.0 million of our investment securities are invested
      in
      auction note securities. Our auction note securities are public securities
      with
      long-term nominal maturities for which the interest rates are reset through
      a
      dutch auction each month. The monthly auctions historically have provided a
      liquid market for these securities. Our investments in auction note securities
      represent interests in student loan-backed securities. Consistent with our
      investment policy guidelines, our auction note securities all had “triple A”
credit ratings at the time of purchase. Global credit and capital markets are
      increasingly experiencing liquidity issues. None of our auction note securities
      held at December 31, 2007, failed an auction in 2007 or 2008; however, a $3
      million investment we made in January 2008 failed two auctions held in February
      2008, as the amount of securities submitted for sale has exceeded the amount
      of
      purchase orders. We will continue to attempt to sell this $3 million investment
      security every seven days until an auction is successful. Our other $9 million
      of investments in auction note securities have their next scheduled auction
      dates in March 2008. If uncertainties in the credit and capital markets
      continue, these markets deteriorate further or we experience any ratings
      downgrades on the auction note securities in our portfolio, we may incur
      impairments to our investment portfolio, which could negatively affect our
      financial condition, cash flow and reported earnings, and the lack of liquidity
      of our auction note securities could have a material impact on our financial
      flexibility and ability to fund our operations.





***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 through the date of the release
      of
      our Phase 3 Sulonex data, expected in the first quarter of 2008. Depending
      on
      the outcome of our Phase 3 study, our cash requirements will vary dramatically.
      In the event of a negative outcome, we believe our current capital resources
      will enable us to meet our revised operating needs and capital expenditures
      for
      at least 12 months from January 2008. 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.


31


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





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





In
      July
      2003, 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
      $1,208,000, 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. to vacate service of process outside
      of
      Israel was held in September 2006. On October 15, 2006, the Circuit Court of
      Jerusalem held that the service of process on Keryx was sustained. We appealed
      this holding. The appeal was denied on September 18, 2007, and we filed a
      petition for certiorari to the Supreme Court of Israel. Our motion for
      certiorari was denied as well. The next preliminary hearing is scheduled for
      February 28, 2008. 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.





**Risks
      Related to Our Intellectual Property**





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





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





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





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





Third
      parties may assert that we are using their proprietary intellectual property
      without authorization. In addition, third parties may have or obtain patents
      in
      the future and claim that our drug products or technologies infringe their
      patents. If we are required to defend against patent suits brought by third
      parties, or if we sue third parties to protect our patent rights, we may be
      required to pay substantial litigation costs, and our management's attention
      may
      be diverted from operating our business. In addition, any legal action against
      our licensors or us that seeks damages or an injunction of our commercial
      activities relating to 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.


32





**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, of which 500,000 shares may be payable in 2008 upon the reaching
      of
      the first milestone. 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.





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.


33





***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 and clinical operations groups.





**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
      $1,208,000, 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. On October 15, 2006, the
      Court held that the service of the claim against Mr. Weiss is vacated.
      Consequently, the Circuit Court of Jerusalem dismissed the suit against Mr.
      Weiss. However, the service against us was sustained. We appealed this holding.
      The appeal was denied on June 18, 2007, and we filed a petition for certiorari
      to the Supreme Court of Israel. Our motion for certiorari was denied as well.
      The next preliminary hearing is scheduled for February 28, 2008. 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.





We
      are
      engaged in an arbitration proceeding with Alfa Wasserman concerning certain
      terms of the License Agreement related to the provision of data to Alfa
      Wasserman and consultation regarding management of the licensed patents. An
      arbitration proceeding was held in October 2007 and we are awaiting decision
      from the arbitrator. The outcome of the arbitration should not affect the
      validity of the license, but whether we are required to share data with Alfa
      Wasserman for that company’s use outside of our licensed territories and our
      ongoing management of the licensed patent portfolio. Alfa Wasserman also seeks
      unspecified damages. If the arbitrator determines that we owe Alfa Wasserman
      the
      data, and that failure to deliver such data constitutes a material breach of
      the
      License Agreement, then we will have 28 days to cure such breach following
      the
      final arbitration decision by delivering any data required to be provided.
      Failure to cure would entitle Alfa Wasserman to terminate the License
      Agreement.


34





In
      November 2007, we initiated an action in the US District Court for the Southern
      District of New York against Panion to enjoin Panion from improperly terminating
      the November 2005 License Agreement for an alleged breach of contract by Keryx
      related to certain manufacturing provisions of the agreement, to enjoin Panion
      from interfering with Keryx’s contractual relationships with certain
      third-parties, as well as to enforce Keryx’s right with respect to the
      prosecution of certain patents. On November 27, 2007, the Court granted Keryx’s
      motion for a preliminary injunction. Panion has since asserted counterclaims
      for
      breach of contract relating to certain manufacturing provisions of the license
      agreement and the parties have reached a tentative agreement to settle the
      litigation. If the parties are unable to resolve the matter by a settlement,
      we
      will proceed with the action to resolve the parties’ respective claims, in which
      event Keryx will incur significant legal expenses. The matter is currently
      scheduled for trial in the second half of 2008. In the event that Keryx is
      found
      to be in breach of contract, it will have thirty days in which to cure such
      breach before Panion can terminate the agreement based on the alleged
      breach.





**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
      2007.





**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, 2007**
            
            **High**
            
            **Low**Fourth
                Quarter
            
            $
            11.14
            
            $
            8.40Third
                Quarter
            
            $
            11.05
            
            $
            8.27Second
                Quarter
            
            $
            11.64
            
            $
            9.77First
                Quarter
            
            $
            13.27
            
            $
            10.19





**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





***Holders***





The
      number of record holders of our common stock as of February 21, 2008 was 41.





***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.


35





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





The
      following table provides information as of December 31, 2007, 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 2002 CEO Incentive Stock Option Plan, the 2004 President
      Incentive Plan, the 2004 Long-Term Incentive Plan, 2007 CAO Inducement Plan,
      2007 General Counsel Incentive Stock Option Plan and the 2007 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
              
              
              7,616,516
              
              $
              9.05
              
              
              5,507,620Equity
                  compensation plans not approved by security holders
              
              
              3,252,657
              
              $
              4.49
              
              
              —Total
              
              
              10,869,173
              
              $
              7.69
              
              
              5,507,620





For
      information about all of our equity compensation plans, see Note 9 to our Consolidated
      Financial Statements included
      in this report .


36


**COMMON
      STOCK PERFORMANCE GRAPH**





The
      following graph compares the cumulative total stockholder return on our common
      stock for the period from December 31, 2002 through December 31, 2007, 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, 2002, 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.





Comparison chart


37


**ITEM
      6. SELECTED FINANCIAL DATA.**





The
      following Statement of Operations Data for the years ended December 31, 2007,
      2006, 2005, 2004 and 2003, and Balance Sheet Data as of December 31, 2007,
      2006,
      2005, 2004 and 2003, 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,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**(in
                thousands, except per share data)**Statement
                of Operations Data:**License
                revenue
            
            $
            204
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Diagnostic
                revenue
            
            
            66
            
            
            103
            
            
            —
            
            
            —
            
            
            —Service
                revenue
            
            
            52
            
            
            431
            
            
            574
            
            
            809
            
            
            —Other
                revenue
            
            
            727
            
            
            —
            
            
            —
            
            
            —
            
            
            —**Total
                revenue**
            
            
            1,049
            
            
            534
            
            
            574
            
            
            809
            
            
            —**Operating
                expenses:**Cost
                of diagnostics sold
            
            
            38
            
            
            140
            
            
            —
            
            
            —
            
            
            —Cost
                of services
            
            
            124
            
            
            390
            
            
            819
            
            
            835
            
            
            —Research
                and development:Non-cash
                compensation
            
            
            3,574
            
            
            6,504
            
            
            594
            
            
            413
            
            
            (486
            )Non-cash
                acquired in-process researchand
                development
            
            
            —
            
            
            —
            
            
            —
            
            
            18,800
            
            
            —Other
                research and development
            
            
            74,889
            
            
            56,139
            
            
            24,182
            
            
            9,805
            
            
            5,996Total
                research and development
            
            
            78,463
            
            
            62,643
            
            
            24,776
            
            
            29,018
            
            
            5,510Selling,
                general and administrative:Non-cash
                compensation
            
            
            7,086
            
            
            8,408
            
            
            775
            
            
            1,087
            
            
            188Other
                selling, general and administrative
            
            
            9,919
            
            
            9,110
            
            
            3,416
            
            
            3,581
            
            
            3,684Total
                selling, general and administrative
            
            
            17,005
            
            
            17,518
            
            
            4,191
            
            
            4,668
            
            
            3,872**Total
                operating expenses**
            
            
            95,630
            
            
            80,691
            
            
            29,786
            
            
            34,521
            
            
            9,382**Operating
                loss**
            
            
            (94,581
            )
            
            (80,157
            )
            
            (29,212
            )
            
            (33,712
            )
            
            (9,382
            )**Other
                income (expense):**Interest
                and other income, net
            
            
            4,555
            
            
            6,393
            
            
            2,317
            
            
            770
            
            
            247Income
                taxes
            
            
            (36
            )
            
            —
            
            
            —
            
            
            (1
            )
            
            27**Net
                loss**
            
            $
            (90,062
            )
            $
            (73,764
            )
            $
            (26,895
            )
            $
            (32,943
            )
            $
            (9,108
            )**Net
                loss per common share**Basic
                and diluted
            
            $
            (2.07
            )
            $
            (1.76
            )
            $
            (0.78
            )
            $
            (1.10
            )
            $
            (0.43
            )**As
                of December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**(in
                thousands)**Balance
                Sheet Data:**Cash,
                cash equivalents, interest receivableand
                investment securities
            
            $
            64,682
            
            $
            125,610
            
            $
            100,733
            
            $
            49,878
            
            $
            31,414Working
                capital
            
            
            42,305
            
            
            102,774
            
            
            83,890
            
            
            46,538
            
            
            30,982Total
                assets
            
            
            81,061
            
            
            140,313
            
            
            105,097
            
            
            50,862
            
            
            32,223Deferred
                revenue, net of current portion
            
            
            11,022
            
            
            —
            
            
            —
            
            
            —
            
            
            —Other
                liabilities
            
            
            202
            
            
            294
            
            
            322
            
            
            92
            
            
            —Contingent
                equity rights
            
            
            4,004
            
            
            4,004
            
            
            4,004
            
            
            4,004
            
            
            —Total
                stockholders’ equity
            
            
            44,422
            
            
            123,821
            
            
            94,678
            
            
            42,804
            
            
            31,226


38


**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 3 and Phase 4 clinical program under
      a
      SPA with the FDA. Additionally, we are developing ZerenexTM (ferric citrate), an
      oral, iron-based compound that has the capacity to bind to phosphate and form
      non-absorbable complexes. Zerenex is currently in Phase 2 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 (perifosine), a novel, potentially
      first-in-class, oral anti-cancer agent that modulates Akt, a protein in the
      body
      associated with tumor survival and growth. KRX-0401 also modulates 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 2 clinical
      development for multiple tumor types and we expect to move into a Phase 3
      clinical program in 2008. 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 product sales 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, public offerings of our common
      stock, and, beginning in 2007, from the upfront payment from our licensing
      agreement with Japan Tobacco Inc. (“JT”) and Torii Pharmaceutical Co., Ltd.
      (“Torii”) and miscellaneous payments from our other prior licensing activities.
      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
      license revenues currently consist of license fees from JT and Torii. We
      recognize these revenues ratably over the estimated period which we will have
      significant responsibilities under the license agreement, with un-amortized
      amounts recorded as deferred revenue.





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.





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
      other
      revenue currently consists of revenue from our license termination agreement
      with Yissum Research and Development Company of the Hebrew University of
      Jerusalem (“Yissum”). Payments from Yissum are recognized as earned since we
      have no responsibilities under the terminated license agreement or the
      termination agreement.





We
      have
      not earned any revenues from the commercial sale of any of our drug candidates.


39





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.





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
      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, 2007, 2006 and 2005 were $74,889,000, $56,139,000,
      and
      $24,182,000, respectively.





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


**Years
                  ended December 31,****2007**
              
              **2006**
              
              **2005**
              
              **Amounts accumulated**
                **during the**
                **development stage**Sulonex
              
              $
              49,372,000
              
              $
              41,533,000
              
              $
              16,075,000
              
              $
              121,184,000KRX-0401
              
              
              15,210,000
              
              
              8,508,000
              
              
              5,394,000
              
              
              31,342,000Zerenex
              
              
              4,825,000
              
              
              1,531,000
              
              
              450,000
              
              
              —Other
                  clinical stage compounds
              
              
              3,990,000
              
              
              2,410,000
              
              
              1,143,000
              
              
              14,972,000Other
              
              
              1,492,000
              
              
              2,157,000
              
              
              1,120,000
              
              
              27,424,000Total
              
              $
              74,889,000
              
              $
              56,139,000
              
              $
              24,182,000
              
              $
              194,922,000





Amounts
      accumulated during the development stage in the above table excludes acquired
      in-process research and development expenses.





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, restricted stock and warrants. Compensation expense
      for
      awards of options and restricted stock 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. 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. For awards of options and
      warrants to consultants and other third-parties, compensation expense is
      determined at the “measurement date,” in accordance with the fair value method
      prescribed by the provisions of Emerging Issues Task Force (“EITF”) 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”). 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. In addition, because some of the options, restricted
      stock and warrants issued to employees, consultants and other third-parties
      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.


40





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.





**RESULTS
      OF OPERATIONS**





**Years
      Ended December 31, 2007 and 2006**





*License
      Revenue.* License
      revenue was $204,000 for the year ended December 31, 2007, as compared to no
      revenue for the year ended December 31, 2006. License revenue for the year
      ended
      December 31, 2007 was related to the amortization of a portion of an upfront
      payment of $12.0 million associated with our license agreement with JT and
      Torii. The upfront payment from JT and Torii will be recognized as license
      revenue on a straight-line basis over the life of the license agreement, which
      is through the expiration of the last-to-expire patent covered by the agreement
      in 2023, and represents the estimated period over which we will have significant
      responsibilities under the license agreement.





*Diagnostic
      Revenue.* Diagnostic revenue decreased by $37,000 to $66,000 for the year ended December
      31, 2007, as compared to diagnostic revenue of $103,000 for the year ended
      December 31, 2006. The decrease in diagnostic revenue was primarily due to
      the
      timing and number of diagnostic kits sold offset by the inclusion of a full
      year
      of Accumin’s results in the year ended December 31, 2007. The prior period
      included results from April 6, 2006, the acquisition date. 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 $379,000 to $52,000 for the year ended December 31, 2007,
      as compared to service revenue of $431,000 for the year ended December 31,
      2006.
      The decrease in service revenue was primarily due to the timing and extent
      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.





*Other
      Revenue.* Other
      revenue was $727,000 for the year ended December 31, 2007, as compared to no
      revenue for the year ended December 31, 2006. Other revenue for the year ended
      December 31, 2007 was related to a payment from Yissum under an October 2004
      termination agreement whereby we received a portion of cash consideration earned
      by Yissum from the terminated license rights. Payments from Yissum are
      recognized as earned since we have no responsibilities under the terminated
      license agreement or the termination agreement.





*Cost
      of Diagnostics Sold* .
      Cost of
      diagnostics sold decreased by $102,000 to $38,000 for the year ended December
      31, 2007, as compared to an expense of $140,000 for the year ended December
      31,
      2006. The decrease in cost of diagnostics sold was
      primarily due to the
      timing and number of diagnostic kits sold and a
      reduction of overhead associated with our diagnostics segment. 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* .
      Cost of
      services decreased by $266,000 to $124,000 for the year ended December 31,
      2007,
      as compared to an expense of $390,000 for the year ended December 31, 2006.
      The
      decrease in cost of services was primarily due to the timing and extent 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 and restricted stock grants
      decreased by $2,930,000 to $3,574,000 for the year ended December 31, 2007,
      as
      compared to an expense of $6,504,000 for the year ended December 31, 2006.
      This
      difference was primarily attributable to, during the year ended December 31,
      2006, approximately $1,128,000 of expense for the accelerated vesting of options
      due to the achievement of a financial milestone, and additionally, in the year
      ended December 31, 2006, based on his activities in this area, a portion of
      the
      compensation expense relating to our chief executive officer included an
      allocation to non-cash compensation expense (research and development).
      Beginning in 2007, based on his current activities, this expense is being
      charged to non-cash compensation expense (selling, general and administrative).
      This change accounted for approximately $2,458,000 of the difference. During
      the
      year ended December 31, 2007, we incurred expenses of approximately $869,000
      related to the grant of 150,000 shares of restricted stock to our President
      upon
      the signing of a new employment agreement with us, which offsets the decrease
      discussed above.


41





*Other
      Research and Development Expenses* .
      Other
      research and development expenses increased by $18,750,000 to $74,889,000 for
      the year ended December 31, 2007, as compared to $56,139,000 for the year ended
      December 31, 2006. The increase in other research and development expenses
      was
      due primarily to a $7,839,000 increase in expenses related to our Sulonex
      pivotal Phase 3 and Phase 4 clinical programs. The comparative period last
      year
      included one-half, or $1,000,000, of a one-time bonus paid to our Chief
      Executive Officer pursuant to his employment agreement for the achievement
      of a
      corporate milestone. In addition, the increase was due to a $6,702,000 increase
      in expenses related to KRX-0401 (including a $1,250,000 milestone), a $3,294,000
      increase in expenses related to Zerenex (including a $2,500,000 license-related
      accrual for a contingent liability) and a $1,580,000 increase in expenses
      related to our other clinical compounds (including $997,000 of expenses relating
      to the in-licensing and purchase of related inventory for KRX-0701).





Depending
      on the outcome of our Phase 3 study for Sulonex, our other research and
      development costs will vary dramatically over the next year. In the event of
      a
      negative outcome, we would expect our other research and development costs
      to
      decrease. With a positive outcome, we would expect our other research and
      development costs to increase as a result of the continuation of the Phase
      4
      clinical program for Sulonex, as well as the acceleration 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
      decreased by $1,322,000 to $7,086,000 for the year ended December 31, 2007,
      as
      compared to an expense of $8,408,000 for the year ended December 31, 2006.
      This
      difference was primarily attributable to, during the year ended December 31,
      2006, approximately $1,636,000 of expense for the accelerated vesting of options
      due to the achievement of a financial milestone, and approximately $1,697,000
      of
      expense for modifications made by the Board of Directors of the vesting and
      exercisability of certain grants during the second quarter of 2006. In the
      year
      ended December 31, 2006, based on his activities in this area, a portion of
      the
      compensation expense relating to our chief executive officer included an
      allocation to non-cash compensation expense (research and development).
      Beginning in 2007, based on his current activities, this expense is being
      charged to non-cash compensation expense (selling, general and administrative),
      accounting for approximately $2,458,000 of increased expense, which offsets
      the
      decrease discussed above. In addition, during the year ended December 31, 2007,
      we recorded a reduction of expense of approximately $780,000 associated with
      stock options and restricted stock issued to our former chief financial officer
      in 2006, who resigned in the second quarter of 2007.





*Other
      Selling, General and Administrative Expenses* .
      Other
      selling, general and administrative expenses increased by $809,000 to $9,919,000
      for the year ended December 31, 2007, as compared to an expense of $9,110,000
      for the year ended December 31, 2006. Other selling, general and administrative
      expenses for the year ended December 31, 2007 included an impairment charge
      of
      approximately $600,000 related to certain intangibles associated with Accumin’s
      diagnostic product. Additionally, there was an increase in legal fees of
      approximately $1,243,000 associated primarily with the Alfa Wasserman
      arbitration (see Legal Proceedings) and general maintenance of our products.
      The
      comparative period last year included one-half, or $1,000,000, of a one-time
      bonus paid to our Chief Executive Officer pursuant to his employment agreement
      for the achievement of a corporate milestone. In addition, during the year
      ended
      December 31, 2007, we incurred additional expenses associated with the scale-up
      of our operations and infrastructure to prepare for commercialization of our
      drug candidates.





Depending
      on the outcome of our Phase 3 study for Sulonex, our other selling, general
      and
      administrative costs will vary dramatically over the next year. In the event
      of
      a negative outcome, we would expect our other selling, general and
      administrative costs to decrease. With a positive outcome, we would expect
      our
      other selling, general and administrative costs to increase as we scale-up
      our
      operations and infrastructure to prepare to commercialize Sulonex.





*Interest
      and Other Income, Net* .
      Interest and other income, net, decreased by $1,838,000 to $4,555,000 for the
      year ended December 31, 2007, as compared to income of $6,393,000 for the year
      ended December 31, 2006. The decrease resulted from a lower level of invested
      funds as compared to the comparable period last year.





*Income
      Taxes* . We
      recorded $36,000 in income tax expense for the year ended December 31, 2007,
      as
      a result of income tax withheld associated with the Yissum revenue as described
      above.


42





**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.





*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.





*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.





*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.





*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 3 and Phase 4 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.





*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 was 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.





*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.


43





**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      have
      financed our operations from inception primarily through public offerings of
      our
      common stock, various private placement transactions, option and warrant
      exercises, and, beginning in 2007, from the upfront payment from our licensing
      agreement with JT and Torii and miscellaneous payments from our other prior
      licensing activities.





As
      of
      December 31, 2007, we had $64.7 million in cash, cash equivalents, interest
      receivable and investment securities, a decrease of $60.9 million from December
      31, 2006. Cash used in operating activities for the year ended December 31,
      2007
      was $57.6 million, as compared to $52.2 million for the year ended December
      31,
      2006. This increase was due primarily to increased expenditures associated
      with
      the execution of our business plan, including costs associated with our pivotal
      Phase 3 and Phase 4 clinical program for Sulonex and the expansion of our other
      clinical programs, partially offset by an increase of approximately $11.8
      million in deferred revenue associated with unamortized portion of an upfront
      payment of $12.0 million associated with our license agreement with JT and
      Torii. For the year ended December 31, 2007, net cash provided by investing
      activities of $27.9 million was primarily the result of the maturity and sale
      of
      marketable securities in our investment portfolio, net of purchases, of
      approximately $31.0 million, partially offset by purchases of property, plant
      and equipment, net of disposals, of approximately $3.1 million. For the year
      ended December 31, 2007, net cash provided by financing activities of $3,000
      was
      primarily the result of $271,000 of proceeds from the exercise of options,
      offset by the surrendering to Keryx of 23,848 shares of common stock, at a
      cost
      of approximately $268,000, by our President and former Chief Financial Officer,
      in order to satisfy tax withholding obligations upon the vesting of their
      restricted stock.





We
      have
      entered into a relationship with SPL, a U.S.-based contract manufacturer, for
      Sulonex 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 and produce initial commercialization quantities of
      Sulonex (for approximately one to three years from launch). As of December
      31,
      2007, we have spent approximately $11.2 million in capital expenditures building
      our manufacturing suite for Sulonex. We anticipate that in the first half of
      2008, after equipment validation has been completed, the facility will be ready
      for its intended use.





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.





We
      believe that our $64.7 million in cash, cash equivalents, interest receivable
      and investment securities as of December 31, 2007 will be sufficient to enable
      us to meet our planned operating needs and capital expenditures through the
      date
      of the release of our Phase 3 Sulonex data, which is expected in the first
      quarter of 2008. Depending on the outcome of our Phase 3 study, our cash
      requirements will vary dramatically. In the event of a negative outcome, we
      believe our current capital resources will enable us to meet our revised
      operating needs and capital expenditures for at least 12 months from January
      2008.





As
      of
      December 31, 2007, $42.2 million of our $64.7 million in cash, cash equivalents,
      interest receivable and investment securities are invested in highly liquid
      investments such as cash, money market accounts and short-term and long-term
      U.S. government debt securities. As of December 31, 2007, 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 liquidity related to these investments. We expect that our
      liquidity needs throughout 2008 will continue to be funded from existing cash,
      cash equivalents, and these short-term marketable securities.





As
      of
      December 31, 2007, $22.2 million of our $64.7 million in cash, cash equivalents,
      interest receivable and investment securities are invested in auction note
      securities. Our auction note securities are public securities with long-term
      nominal maturities for which the interest rates are reset through a dutch
      auction each month. The monthly auctions historically have provided a liquid
      market for these securities. Our investments in auction note securities
      represent interests in student loan-backed securities. Consistent with our
      investment policy guidelines, our auction note securities all had “triple A”
credit ratings at the time of purchase.


44





As
      of
      February 22, 2008, $12.0 million of our investment securities are invested
      in
      auction note securities. Global credit and capital markets are increasingly
      experiencing liquidity issues. None of our auction note securities held at
      December 31, 2007, failed an auction in 2007 or 2008; however, a $3 million
      investment we made in January 2008 failed two auctions held in February 2008,
      as
      the amount of securities submitted for sale has exceeded the amount of purchase
      orders. We will continue to attempt to sell this $3 million investment security
      every seven days until an auction is successful. Our other $9 million of
      investments in auction note securities have their next scheduled auction dates
      in March 2008. As of December 31, 2007, we have not recorded any losses or
      impairment charges related to our auction note securities since there was no
      temporary or other-than-temporary decline in value in the securities in either
      2007 or 2008.





If
      uncertainties in the credit and capital markets continue, these markets
      deteriorate further or we experience any ratings downgrades on the auction
      note
      securities in our portfolio, we may incur impairments to our investment
      portfolio, which could negatively affect our financial condition, cash flow
      and
      reported earnings, and the lack of liquidity of our auction note securities
      could have a material impact on our financial flexibility and ability to fund
      our operations.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





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





**OBLIGATIONS
      AND COMMITMENTS**





As
      of
      December 31, 2007, we have known contractual obligations, commitments and
      contingencies of $48,309,000. Of this amount, $46,529,000 relates to research
      and development agreements (primarily relating to our pivotal Phase 3 and Phase
      4 clinical program for Sulonex), of which $23,910,000 is due within the next
      year, with the remaining balance due as per the schedule below. The additional
      $1,780,000 relates to our operating lease obligations, of which $724,000 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
              
              $
              46,529,000
              
              $
              23,910,000
              
              $
              22,619,000
              
              $
              --
              
              $
              --Operating
                  leases
              
              
              1,780,000
              
              
              724,000
              
              
              1,056,000
              
              
              --
              
              
              --Total
              
              $
              48,309,000
              
              $
              24,634,000
              
              $
              23,675,000
              
              $
              --
              
              $
              --





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 $93.8 million over the life of the licenses, of which
      approximately $74.5 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 three licensors $50,000, $75,000, and
      $22,500, respectively, annually until the licenses expire. 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, of which 500,000 shares
      may
      be payable in 2008 upon the reaching of the first milestone. 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.


45




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





*Stock
      Compensation* .
      We have
      granted stock options and restricted stock to employees, directors and
      consultants, as well as warrants to other third parties. 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; 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 addition, because some
      of
      the options and warrants issued to employees, consultants and other
      third-parties vest upon the achievement of certain milestones, the total expense
      is uncertain.





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 reversal of 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 and expense in any
      accounting period. In addition, administrative costs related to external CROs
      are recognized on a straight-line basis over the estimated contractual period.
      With respect to clinical site costs, the financial terms of these agreements
      are
      subject to negotiation and vary from contract to contract. Payments under these
      contracts may be uneven, and depend on factors such as the achievement of
      certain events, the successful recruitment of patients, the completion of
      portions of the clinical trial or similar conditions. The objective of our
      policy is to match the recording of expenses in our financial statements to
      the
      actual services received and efforts expended. As such, expense accruals related
      to clinical site costs are recognized based on our estimate of the degree of
      completion of the event or events specified in the specific clinical study
      or
      trial contract.





*Revenue
      Recognition.* We
      recognize license revenue consistent with the provisions of Staff Accounting
      Bulletin (“SAB”) No. 104 and EITF Issue No. 00-21, “Revenue
      Arrangements with Multiple Deliverables.” We analyze each element of our
      licensing agreement to determine the appropriate revenue recognition. We
      recognize revenue on upfront payments over the period of significant involvement
      under the related agreements unless the fee is in exchange for products
      delivered or services rendered that represent the culmination of a separate
      earnings process and no further performance obligation exists under the
      contract. We recognize milestone payments upon the achievement of specified
      milestones if (1) the milestone is substantive in nature, and the
      achievement of the milestone was not reasonably assured at the inception of
      the
      agreement and (2) the fees are nonrefundable. Any milestone payments
      received prior to satisfying these revenue recognition criteria are recognized
      as deferred revenue. Sales milestones and royalties that are deferred will
      be
      recognized when earned under the agreements.


46


*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, 2007, there was approximately $3.2 million of goodwill on our
      consolidated balance sheet. SFAS No. 142, “Goodwill and Other Intangible
      Assets,” or SFAS No. 142, addresses how intangible assets that are acquired
      individually or with a group of other assets (but not those acquired in a
      business combination) should be accounted for in financial statements upon
      their
      acquisition. This statement also addresses how goodwill and other intangible
      assets should be accounted for after they have been initially recognized in
      the
      financial statements. 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
      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.





*Impairment.* In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” the Company recognizes an impairment loss when circumstances
      indicate that the carrying value of long-lived tangible and intangible assets
      with finite lives may not be recoverable. Management’s policy in determining
      whether an impairment indicator exists, a triggering event, comprises measurable
      operating performance criteria as well as qualitative measures. If an analysis
      is necessitated by the occurrence of a triggering event, the Company makes
      certain assumptions in determining the impairment amount. 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. The Company continues to derive
      revenue from the sale of the Accumin diagnostic tool. During the first quarter
      of 2007, management reviewed both its original and projected revenue estimates
      associated with the diagnostic tool. As a result of this analysis, the Company
      concluded that the asset was impaired and recorded an impairment charge of
      approximately $600,000 to write-down identifiable intangible long-lived assets
      associated with Accumin. The charge was recorded in other selling, general
      and
      administrative expenses within the Diagnostics segment. Prior to the
      impairment charge taken in the first quarter of 2007, we amortized our
      identifiable intangible assets associated with Accumin over their estimated
      economic lives, which was 12 years, the life of the patents, using the
      straight-line method.





*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. We recorded
      $36,000 in income tax expense for the year ended December 31, 2007, as a result
      of income tax withheld associated with the payment from Yissum relating to
      a
      terminated license agreement.


47





On
      January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes,” or FIN 48. FIN 48 clarifies the criteria for
      recognizing tax benefits related to uncertain tax positions under SFAS No.
      109,
“Accounting for Income Taxes”, and requires additional financial statement
      disclosure. FIN 48 requires that we recognize, in our consolidated financial
      statements, the impact of a tax position if that position is more likely than
      not to be sustained upon examination, based on the technical merits of the
      position. Adoption of FIN 48 had no impact on our consolidated results of
      operations and financial position.





*Accounting
      For Our Manufacturing Suite* .
      We have
      entered into a relationship with SPL, a U.S.-based contract manufacturer, for
      Sulonex 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 and produce initial commercialization quantities of
      Sulonex (for approximately one to three years from launch). As of December
      31,
      2007, we have spent approximately $11.2 million in capital expenditures building
      the suite. We anticipate that in the first half of 2008, after equipment
      validation has been completed, the facility will be ready for its intended
      use
      and we will begin to depreciate this asset at that time. Significant estimates
      and judgments were made, and will continue to be made, relating to the
      appropriate in-service date of these assets and the related asset retirement
      obligation.





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS No. 141R”) which replaces SFAS No. 141. SFAS No. 141R
      changes the accounting for business combinations, including the measurement
      of
      acquirer shares issued in consideration for a business combination, the
      recognition of contingent consideration, the accounting for contingencies,
      the
      recognition of capitalized in-process research and development, the accounting
      for acquisition-related restructuring cost accruals, the treatment of
      acquisition related transaction costs and the recognition of changes in the
      acquirer’s income tax valuation allowance and income tax uncertainties. SFAS No.
      141R applies prospectively to business combinations for which the acquisition
      date is on or after the beginning of the first annual reporting period beginning
      on or after December 15, 2008, and interim periods within those fiscal years.
      Early application is prohibited.





In
      December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB 51,” (“SFAS No. 160”)
      which changes the accounting and reporting for minority interests. Minority
      interests will be recharacterized as noncontrolling interests and will be
      reported as a component of equity separate from the parent’s equity, and
      purchases or sales of equity interests that do not result in a change in control
      will be accounted for as equity transactions. In addition, net income
      attributable to the noncontrolling interest will be included in consolidated
      net
      income on the face of the income statement and, upon a loss of control, the
      interest sold, as well as any interest retained, will be recorded at fair value
      with any gain or loss recognized in earnings. SFAS No. 160 is effective for
      fiscal years (including interim periods within those fiscal years) beginning
      on
      or after December 15, 2008. Earlier adoption is prohibited. The statement shall
      be applied prospectively as of the beginning of the fiscal year in which it
      is
      initially applied, except for the presentation and disclosure requirement which
      shall be applied retrospectively for all periods presented. We expect that
      the
      adoption of SFAS No. 160 will not have a material impact on our results of
      operations and financial position.


In
          December 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for
          Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 defines collaborative
          arrangements and establishes reporting requirements for transactions between
          participants in a collaborative arrangement and between participants in
          the
          arrangement and third parties. EITF 07-1 also establishes the appropriate
          income
          statement presentation and classification for joint operating activities
          and
          payments between participants, as well as the sufficiency of the disclosures
          related to these arrangements. EITF 07-1 is effective for fiscal years
          beginning
          after December 15, 2008. EITF 07-1 shall be applied using modified version
          of
          retrospective transition for those arrangements in place at the effective
          date.
          An entity should report the effects of applying this Issue as a change
          in
          accounting principle through retrospective application to all prior periods
          presented for all arrangements existing as of the effective date, unless
          it is
          impracticable to apply the effects the change retrospectively. We are currently
          assessing the impact that EITF 07-1 may have on our results of operations
          and
          financial position.


48




In
      June
      2007, the EITF reached a consensus on EITF Issue No. 07-3, “Accounting for
      Nonrefundable Advance Payments for Goods or Services Received to Be Used in
      Future Research and Development Activities” (“EITF 07-3”). EITF No. 07-3
      requires that nonrefundable advance payments for goods or services that will
      be
      used or rendered for future research and development activities be deferred
      and
      amortized over the period that the goods are delivered or the related services
      are performed, subject to an assessment of recoverability. The provisions of
      EITF 07-3 will be effective for financial statements issued for fiscal years
      beginning after December 15, 2007, and interim periods within those fiscal
      years. Early application is prohibited. The provisions of this EITF are
      applicable for new contracts entered into on or after the effective date. We
      expect that the adoption of EITF 07-3 will not have a material impact on our
      results of operations and financial position.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - including an amendment of FASB
      Statement No. 115” (“SFAS 159”). SFAS 159 is expected to expand the use of fair
      value accounting, but does not affect existing standards which require certain
      assets or liabilities to be carried at fair value. The objective of SFAS 159
      is
      to improve financial reporting by providing companies with the opportunity
      to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. Under SFAS 159, a company may choose, at its initial application
      or
      at other specified election dates, to measure eligible items at fair value
      and
      report unrealized gains and losses on items for which the fair value option
      has
      been elected in earnings at each subsequent reporting date. SFAS 159 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. Were we to
      elect the fair value option for our existing assets and liabilities, the effect
      as of the adoption date, shall be reported as a cumulative-effect adjustment
      to
      the opening balance of retained earnings. We do not expect to elect the fair
      value option to our existing assets and liabilities and thus the adoption of
      SFAS 159 will not have a material impact on our results of operations and
      financial position.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”), which provides guidance for using fair value to measure assets and
      liabilities. SFAS 157 will apply whenever another standard requires (or permits)
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value to any new circumstances. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. In February 2008, the FASB
      deferred the effective date of SFAS 157 for one year for certain non financial
      assets and non financial liabilities that are recognized or disclosed at fair
      value in the financial statements on a nonrecurring basis. We do not expect
      the
      adoption of SFAS 157 to have a material impact on our results of operations
      and
      financial position.





**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
      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, 2007, our
      portfolio of financial instruments consists of cash equivalents and short-term
      and long-term interest bearing securities, including 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, 2007, was less than 12
      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.





As
      of
      February 22, 2008, $12.0 million of our investment securities are invested
      in
      auction note securities. Global credit and capital markets are increasingly
      experiencing liquidity issues. None of our auction note securities held at
      December 31, 2007, failed an auction in 2007 or 2008; however, a $3 million
      investment we made in January 2008 failed two auctions held in February 2008,
      as
      the amount of securities submitted for sale has exceeded the amount of purchase
      orders. We will continue to attempt to sell this $3 million investment security
      every seven days until an auction is successful. Our other $9 million of
      investments in auction note securities have their next scheduled auction dates
      in March 2008. If uncertainties in the credit and capital markets continue,
      these markets deteriorate further or we experience any ratings downgrades on
      the
      auction note securities in our portfolio, we may incur impairments to our
      investment portfolio, which could negatively affect our financial condition,
      cash flow and reported earnings, and the lack of liquidity of our auction note
      securities could have a material impact on our financial flexibility and ability
      to fund our operations.





**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.


49





**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, 2007, management carried out, under the supervision and with the
      participation of our Chief Executive Officer and Chief Accounting 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 Accounting
      Officer concluded that, as of December 31, 2007, 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, 2007. 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, 2007, our internal control over financial reporting was
      effective based on these criteria. KPMG LLP, our independent registered public
      accounting firm has audited the financial statements included in this annual
      report and has issued an attestation report on our internal control over
      financial reporting. Such reports are found beginning on page F-1.




*Changes
      in Internal Control Over Financial Reporting.* There
      were no changes in our internal controls over financial reporting during the
      quarter ended December 31, 2007, 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 Accounting Officer,
      does not expect that our disclosure controls and procedures or our internal
      control over financial reporting will prevent all errors and all fraud. A
      control system, no matter how well conceived and operated, can provide only
      reasonable, not absolute, assurance that the objectives of the control system
      are met. Further, the design of a control system must reflect the fact that
      there are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within our company have been
      detected.





**ITEM
      9B. OTHER INFORMATION**





Not
      Applicable.





**Part
      III**





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





The
      information required by this Item is incorporated herein by reference from
      our
      Proxy Statement for our 2008 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 2008 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 2008 Annual Meeting of
      Stockholders.


50


**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 2008 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 2008 Annual Meeting of Stockholders.


51


**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, 2007 and 2006
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2007, 2006
                and
                2005, and the period from December 3, 1996 to December 31,
                2007
            F-4Consolidated
                Statements of Changes in Stockholders’ Equity for the years ended December
                31, 2007, 2006, and 2005, and the period from December 3, 1996 to
                December
                31, 2007
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005, and the period from December 3, 1996 to December 31,
                2007
            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, filed on January 15, 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, filed on February
                20,
                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.3.3
            Amendment
                to Amended and Restated Certificate of Incorporation of Keryx
                Biopharmaceuticals, Inc., dated July 24, 2007, filed as Exhibit 3.3
                to the
                Registrant's Quarterly Report on Form 10-Q for the quarter ended
                June 30,
                2007, filed on August 9, 2007 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.


52





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.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
                reference.4.7
            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!
            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.10.2!
            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.10.3
            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.10.4†
            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.10.5†
            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.10.6†
            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.10.7†
            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.10.8
            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.10.9
            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.


53





10.10
            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.10.11
            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.10.12
            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.10.13!
            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.10.14!
            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.10.15!
            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.10.16
            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.10.17†
            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.10.18†
            Employment
                Agreement between Mark Stier and Keryx Biopharmaceuticals, Inc.,
                dated as
                of March 23, 2007,filed
                as Exhibit 10.1 to the Registrant’s Annual Report on Form 10-Q for the
                quarter ended March 31, 2007, filed on May 7, 2007, and incorporated
                herein by reference.
                .10.19!
            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.10.20*
            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.10.21
            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.10.22†
            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.


54





10.23*
            Sub-license
                Agreement by and among Keryx Biopharmaceuticals, Inc., Japan Tobacco
                Inc.,
                and Torii Pharmaceutical Co., Ltd. dated September 26, 2007,filed
                as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
                quarter ended September 31, 2007, filed on November 9, 2007, and
                incorporated herein by reference.10.24†
            Employment
                Agreement between Beth F. Levine and Keryx Biopharmaceuticals, Inc.,
                dated
                as of April 25, 2007,filed
                as Exhibit 10.2 to the Registrant’s Annual Report on Form 10-Q for the
                quarter ended March 31, 2007, filed on May 7, 2007, and incorporated
                herein by reference.10.25†
            Employment
                Agreement between Dr. I. Craig Henderson and Keryx Biopharmaceuticals,
                Inc. dated April 25, 2007,filed as Exhibit 10.3 to the Registrant’s Annual Report on Form 10-Q for
                the quarter ended March 31, 2007, filed on May 7, 2007, and incorporated
                herein by reference.10.26†
            2007
                Chief Accounting Officer Inducement Stock Option Plan dated March
                23,
                2007,filed as Exhibit 10.4 to the Registrant’s Annual Report on Form 10-Q for
                the quarter ended March 31, 2007, filed on May 7, 2007, and incorporated
                herein by reference.10.27†
            2007
                General Counsel Incentive Stock Option Plan dated April 25,
                2007,filed as Exhibit 10.5 to the Registrant’s Annual Report on Form 10-Q for
                the quarter ended March 31, 2007, filed on May 7, 2007, and incorporated
                herein by reference.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
                February 27, 2008.31.2
            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
                February 27, 2008.32.1
            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
                February
                27, 2008.32.2
            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
                February
                27, 2008.




!  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.


55





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


**Consolidated
      Financial Statements as of December 31, 2007**








Contents
            PageReports
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2007, 2006
                and
                2005, and the period from December 3, 1996 to December 31,
                2007
            F-4Consolidated
                Statements of Changes in Stockholders’ Equity for the years ended December
                31, 2007, 2006, and 2005, and the period from December 3, 1996 to
                December
                31, 2007
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005, and the period from December 3, 1996 to December 31,
                2007
            F-10Notes
                to the Consolidated Financial Statements
            F-12







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


**Consolidated
      Financial Statements as of December 31, 2007**





**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, 2007 and 2006, 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, 2007, and for the period
      from
      December 3, 1996 to December 31, 2007. 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 as of December 31, 2007 and 2006, and the results of
      their
      operations and their cash flows for each of the years in the three-year period
      ended December 31, 2007, and for the period from December 3, 1996 to December
      31, 2007, 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 Company’s internal control over financial
      reporting as of December 31, 2007, 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 February
      27, 2008 expressed an unqualified opinion on the effectiveness of the Company’s
      internal control over financial reporting.





/s/
      KPMG
      LLP





New
      York,
      New York


February
      27, 2008


F-1


**Report
      of Independent Registered Public Accounting Firm**





The
      Board
      of Directors and Stockholders


Keryx
      Biopharmaceuticals, Inc.:





We
      have
      audited Keryx Biopharmaceuticals, Inc. and subsidiaries’ (the “Company”), a
      development stage company, internal control over financial reporting as of
      December 31, 2007, 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, included in
      the
      accompanying “Management’s Report on Internal Control over Financial Reporting”
in item 9A. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and
      testing and evaluating the design and operating effectiveness of internal
      control based on the assessed risk. Our audit also included 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, the Company maintained, in all material respects, effective internal
      control over financial reporting as of December 31, 2007, based on criteria
      established in Internal Control Integrated Framework issued by the Committee
      of
      Sponsoring Organizations of the Treadway Commission.





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, 2007 and 2006,
      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,
      2007, and for the period from December 3, 1996 to December 31, 2007, and our
      report dated February 27, 2008 expressed an unqualified opinion on those
      consolidated financial statements.





/s/
      KPMG
      LLP





New
      York,
      New York


February
      27, 2008


F-2





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


**Consolidated
      Balance Sheets as of December 31**


(in
      thousands, except share and per share amounts)





**2007**
            
            **2006****Assets**Current
                assetsCash
                and cash equivalents
            
            $
            19,065
            
            $
            48,736Short-term
                investment securities
            
            
            43,038
            
            
            63,659Accrued
                interest receivable
            
            
            283
            
            
            525Other
                current assets
            
            
            1,330
            
            
            2,048Total
                current assets
            
            
            63,716
            
            
            114,968Long-term
                investment securities
            
            
            2,296
            
            
            12,690Property,
                plant and equipment, net
            
            
            11,497
            
            
            8,489Goodwill
            
            
            3,208
            
            
            3,208Other
                assets, net
            
            
            344
            
            
            958Total
                assets
            
            $
            81,061
            
            $
            140,313**Liabilities
                and stockholders’ equity**Current
                liabilitiesAccounts
                payable and accrued expenses
            
            $
            19,134
            
            $
            10,460Accrued
                compensation and related liabilities
            
            
            1,254
            
            
            1,534Current
                portion of deferred revenue
            
            
            1,023
            
            
            200Total
                current liabilities
            
            
            21,411
            
            
            12,194Deferred
                revenue, net of current portion
            
            
            11,022
            
            
            --Contingent
                equity rights
            
            
            4,004
            
            
            4,004Other
                liabilities
            
            
            202
            
            
            294Total
                liabilities
            
            
            36,639
            
            
            16,492Commitments
                and contingencies (Note 13)Stockholders’
                equityCommon
                stock, $0.001 par value per share (95,000,000 and 60,000,000 shares
                authorized, 43,751,101 and 43,516,669 shares issued, 43,671,153 and
                43,460,569 shares outstanding at December 31, 2007, and 2006,
                respectively)
            
            
            44
            
            
            44Additional
                paid-in capital
            
            
            323,009
            
            
            312,078Treasury
                stock, at cost, 79,948 and 56,100 shares at December 31, 2007, and
                2006,
                respectively
            
            
            (357
            )
            
            (89
            )Deficit
                accumulated during the development stage
            
            
            (278,274
            )
            
            (188,212
            )Total
                stockholders’ equity
            
            
            44,422
            
            
            123,821Total
                liabilities and stockholders’ equity
            
            $
            81,061
            
            $
            140,313





*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)


**2007**
              
              **2006**
              
              **2005**
              
              **Amounts
                  accumulated during the********development****stage**Revenue:License
                  revenue
              
              $
              204
              
              $
              —
              
              $
              —
              
              $
              204Diagnostic
                  revenue
              
              
              66
              
              
              103
              
              
              —
              
              
              169Service
                  revenue
              
              
              52
              
              
              431
              
              
              574
              
              
              1,866Other
                  revenue
              
              
              727
              
              
              —
              
              
              —
              
              
              1,027Total
                  revenue
              
              
              1,049
              
              
              534
              
              
              574
              
              
              3,266Operating
                  expenses:Cost
                  of diagnostics sold
              
              
              38
              
              
              140
              
              
              —
              
              
              178Cost
                  of services
              
              
              124
              
              
              390
              
              
              819
              
              
              2,168Research
                  and development:Non-cash
                  compensation
              
              
              3,574
              
              
              6,504
              
              
              594
              
              
              17,812Non-cash
                  acquired in-process research and development
              
              
              —
              
              
              —
              
              
              —
              
              
              18,800Other
                  research and development
              
              
              74,889
              
              
              56,139
              
              
              24,182
              
              
              194,922Total
                  research and development
              
              
              78,463
              
              
              62,643
              
              
              24,776
              
              
              231,534Selling,
                  general and administrative:Non-cash
                  compensation
              
              
              7,086
              
              
              8,408
              
              
              775
              
              
              20,935Other
                  selling, general and administrative
              
              
              9,919
              
              
              9,110
              
              
              3,416
              
              
              44,115Total
                  selling, general and administrative
              
              
              17,005
              
              
              17,518
              
              
              4,191
              
              
              65,050Total
                  operating expenses
              
              
              95,630
              
              
              80,691
              
              
              29,786
              
              
              298,930Operating
                  loss
              
              
              (94,581
              )
              
              (80,157
              )
              
              (29,212
              )
              
              (295,664
              )Interest
                  and other income, net
              
              
              4,555
              
              
              6,393
              
              
              2,317
              
              
              17,917Net
                  loss before income taxes
              
              
              (90,026
              )
              
              (73,764
              )
              
              (26,895
              )
              
              (277,747
              )Income
                  taxes
              
              
              36
              
              
              —
              
              
              —
              
              
              527Net
                  loss
              
              $
              (90,062
              )
              $
              (73,764
              )
              $
              (26,895
              )
              $
              (278,274
              )Basic
                  and diluted loss per common share
              
              $
              (2.07
              )
              $
              (1.76
              )
              $
              (0.78
              )
              $
              (12.34
              )Weighted
                  average shares used in computing basic and diluted net loss per
                  common
                  share
              
              
              43,583,950
              
              
              41,919,741
              
              
              34,384,576
              
              
              22,543,474





*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, 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-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, 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, restricted stock 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, restricted stock 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-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, 2006
              
              
              —
              
              $
              —
              
              
              43,516,669
              
              $
              44
              
              $
              312,078Changes
                  during the year:Cancellation
                  of common stock held in escrow
              
              
              —
              
              
              —
              
              
              (15,646
              )
              
              (—)*
              
              
              —Issuance
                  of restricted stock
              
              
              —
              
              
              —
              
              
              195,000
              
              
              —*
              
              
              —Forfeiture
                  of restricted stock
              
              
              —
              
              
              —
              
              
              (83,334
              )
              
              (—)*
              
              
              —Surrender
                  of common stock for tax withholding
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Exercise
                  of options
              
              
              —
              
              
              —
              
              
              138,412
              
              
              —*
              
              
              271Compensation
                  in respect of options, restricted stock and warrants granted to
                  employees,
                  directors and third-parties
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              10,660Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Balance
                  at December 31, 2007
              
              
              —
              
              $
              —
              
              
              43,751,101
              
              $
              44
              
              $
              323,009


**Treasury
                  stock**
              
              **Unearned**
              
              **Deficit
                  accumulated during the development****Shares**
              
              **Amount**
              
              **compensation**
              
              **stage**
              
              **Total**Balance
                  at December 31, 2006
              
              
              56,100
              
              $
              (89
              )
              $
              —
              
              $
              (188,212
              )
              $
              123,821Changes
                  during the year:Cancellation
                  of common stock held in escrow
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (—)*Issuance
                  of restricted stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —*Forfeiture
                  of restricted stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (—)*Surrender
                  of common stock for tax withholding
              
              
              23,848
              
              
              (268
              )
              
              —
              
              
              —
              
              
              (268
              )Exercise
                  of options
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              271Compensation
                  in respect of options, restricted stock and warrants granted to
                  employees,
                  directors and third-parties
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              10,660Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (90,062
              )
              
              (90,062
              )Balance
                  at December 31, 2007
              
              
              79,948
              
              $
              (357
              )
              $
              —
              
              $
              (278,274
              )
              $
              44,422





*
      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,
                  2007):**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
              
              
              —*
              
              
              —Cancellation
                  of common stock held in escrow
              
              
              —
              
              
              —
              
              
              (15,646
              )
              
              (—)*
              
              
              —Issuance
                  of restricted stock
              
              
              —
              
              
              —
              
              
              295,000
              
              
              —*
              
              
              —Forfeiture
                  of restricted stock
              
              
              —
              
              
              —
              
              
              (83,334
              )
              
              (—)*
              
              
              —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
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Surrender
                  of common stock for tax withholding
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Exercise
                  of warrants
              
              
              —
              
              
              —
              
              
              753,897
              
              
              1
              
              
              3,050Exercise
                  of options
              
              
              —
              
              
              —
              
              
              5,436,198
              
              
              5
              
              
              6,064Reclassification
                  of unearned compensation upon adoption of SFAS No. 123R
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,581
              )Compensation
                  in respect of options, restricted stock and warrants granted to
                  employees,
                  directors and third-parties
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              39,738Warrants
                  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, 2007
              
              
              —
              
              $
              —
              
              
              43,751,101
              
              $
              44
              
              $
              323,009





*
      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,
                  2007):**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
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —*Cancellation
                  of common stock held in escrow
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (—)*Issuance
                  of restricted stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —*Forfeiture
                  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
              )Surrender
                  of common stock for tax withholding
              
              
              23,848
              
              
              (268
              )
              
              —
              
              
              —
              
              
              (268
              )Exercise
                  of warrants
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3,051Exercise
                  of options
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              6,069Reclassification
                  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
              )
              
              —
              
              
              38,157Warrants
                  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
              
              
              —
              
              
              —
              
              
              —
              
              
              (278,274
              )
              
              (278,274
              )Balance
                  at December 31, 2007
              
              
              79,948
              
              $
              (357
              )
              $
              —
              
              $
              (278,274
              )
              $
              44,422





*
      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)


**2007**
              
              **2006**
              
              **2005**
              
              **Amounts**
                **accumulated**
                **during
                  the**
                **development**
                **stage**CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (90,062
              )
              $
              (73,764
              )
              $
              (26,895
              )
              $
              (278,274
              )Adjustments
                  to reconcile net loss to cash flows used in operating activities:Acquired
                  in-process research and development
              
              
              —
              
              
              —
              
              
              —
              
              
              18,800Stock
                  compensation expense
              
              
              10,660
              
              
              14,912
              
              
              1,369
              
              
              38,747Issuance
                  of common stock to technology licensor
              
              
              —
              
              
              —
              
              
              —
              
              
              359Interest
                  on convertible notes settled through issuance of preferred
                  shares
              
              
              —
              
              
              —
              
              
              —
              
              
              253Depreciation
                  and amortization
              
              
              151
              
              
              224
              
              
              190
              
              
              2,986(Gain)
                  loss on disposal of property, plant and equipment
              
              
              (1
              )
              
              —
              
              
              2
              
              
              171Impairment
                  charges
              
              
              600
              
              
              —
              
              
              —
              
              
              3,082Exchange
                  rate differences
              
              
              —
              
              
              —
              
              
              —
              
              
              94Changes
                  in assets and liabilities, net of effects of acquisitions:Decrease
                  (increase) in other current assets
              
              
              718
              
              
              1,253
              
              
              (2,578
              )
              
              (858
              )Decrease
                  (increase) in accrued interest receivable
              
              
              242
              
              
              (189
              )
              
              (192
              )
              
              (283
              )(Increase)
                  in security deposits
              
              
              —
              
              
              (255
              )
              
              (8
              )
              
              (263
              )Increase
                  in accounts payable and accrued expenses
              
              
              8,674
              
              
              4,974
              
              
              1,975
              
              
              17,389(Decrease)
                  increase in accrued compensation and related liabilities
              
              
              (280
              )
              
              575
              
              
              193
              
              
              659(Decrease)
                  increase in other liabilities
              
              
              (92
              )
              
              (28
              )
              
              230
              
              
              47Increase
                  (decrease) in deferred revenue
              
              
              11,845
              
              
              97
              
              
              (37
              )
              
              11,589Net
                  cash used in operating activities
              
              
              (57,545
              )
              
              (52,201
              )
              
              (25,751
              )
              
              (185,502
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchases
                  of property, plant and equipment
              
              
              (3,159
              )
              
              (7,597
              )
              
              (964
              )
              
              (16,147
              )Proceeds
                  from disposals of property, plant and equipment
              
              
              15
              
              
              —
              
              
              1
              
              
              440(Increase)
                  in note and accrued interest receivable from related party
              
              
              —
              
              
              —
              
              
              —
              
              
              (356
              )Payments
                  of transaction costs
              
              
              —
              
              
              (231
              )
              
              —
              
              
              (231
              )Decrease
                  (increase) in other assets
              
              
              —
              
              
              27
              
              
              (23
              )
              
              (1,192
              )Investment
                  in held-to-maturity short-term securities
              
              
              (6,136
              )
              
              (4,080
              )
              
              (1,122
              )
              
              (55,049
              )Proceeds
                  from maturity of held-to-maturity short-term securities
              
              
              24,020
              
              
              8,275
              
              
              15,045
              
              
              76,041Investment
                  in available-for-sale short-term securities
              
              
              (56,700
              )
              
              (38,375
              )
              
              (13,700
              )
              
              (114,800
              )Proceeds
                  from sale of available-for-sale short-term securities
              
              
              76,200
              
              
              6,725
              
              
              8,675
              
              
              92,600Investment
                  in held-to-maturity long-term securities
              
              
              (6,372
              )
              
              (16,677
              )
              
              (21,270
              )
              
              (44,319
              )Proceeds
                  from maturity of held-to-maturity long-term securities
              
              
              3
              
              
              5
              
              
              185
              
              
              193Net
                  cash provided by (used in) investing activities
              
              
              27,871
              
              
              (51,928
              )
              
              (13,173
              )
              
              (62,820
              )





*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)





**2007**
            
            **2006**
            
            **2005**
            
            **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
            )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
            
            
            —
            
            
            —
            
            
            —
            
            
            45,795Proceeds
                from exercise of options and warrants
            
            
            271
            
            
            1,988
            
            
            1,610
            
            
            9,120Purchase
                of treasury stock
            
            
            (268
            )
            
            —
            
            
            —
            
            
            (357
            )Net
                cash provided by financing activities
            
            
            3
            
            
            84,685
            
            
            77,400
            
            
            267,382Cash
                acquired in acquisition
            
            
            —
            
            
            5
            
            
            —
            
            
            99Effect
                of exchange rate on cash
            
            
            —
            
            
            —
            
            
            —
            
            
            (94
            )NET
                (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            (29,671
            )
            
            (19,439
            )
            
            38,476
            
            
            19,065Cash
                and cash equivalents at beginning of year
            
            
            48,736
            
            
            68,175
            
            
            29,699
            
            
            —CASH
                AND CASH EQUIVALENTS AT END OF YEAR
            
            $
            19,065
            
            $
            48,736
            
            $
            68,175
            
            $
            19,065NON
                - CASH TRANSACTIONSIssuance
                of common stock in connection with acquisition
            
            $
            —
            
            $
            3,310
            
            $
            —
            
            $
            9,635Contingent
                equity rights in connection with acquisition
            
            
            —
            
            
            —
            
            
            —
            
            
            4,004Assumption
                of liabilities in connection with acquisition
            
            
            —
            
            
            345
            
            
            —
            
            
            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
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            1,166Cash
                paid for income taxes
            
            $
            36
            
            $
            —
            
            $
            —
            
            $
            468





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 2007 and 2006 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. (See Note 6).





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.





F-12





**PRINCIPLES
      OF CONSOLIDATION**





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





**USE
      OF ESTIMATES**





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles (“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, 2007 and 2006 consist of short-term and long-term
      government and auction note 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 are
      not
      yet in production and are not amortized or depreciated until they are ready
      for
      their intended use.





As
      of
      December 31, 2007, the Company has spent approximately $11.2 million in capital
      expenditures building its manufacturing suite for Sulonex. The Company
      anticipates that in the first half of 2008, after equipment validation has
      been
      completed, the facility will be ready for its intended use, and the Company
      will
      begin to depreciate this asset at that time.





**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.





F-13





**REVENUE
      RECOGNITION**





The
      Company recognizes license revenue consistent with the provisions of Staff
      Accounting Bulletin (“SAB”) No. 104 and Emerging Issues Task Force (“EITF”)
      Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The
      Company analyzes each element of its licensing agreement to determine the
      appropriate revenue recognition. The Company recognizes revenue on upfront
      payments over the period of significant involvement under the related agreements
      unless the fee is in exchange for products delivered or services rendered that
      represent the culmination of a separate earnings process and no further
      performance obligation exists under the contract. The Company recognizes
      milestone payments upon the achievement of specified milestones if (1) the
      milestone is substantive in nature, and the achievement of the milestone was
      not
      reasonably assured at the inception of the agreement and (2) the fees are
      nonrefundable. Any milestone payments received prior to satisfying these revenue
      recognition criteria are recognized as deferred revenue. Sales milestones and
      royalties that are deferred will be recognized when earned under the agreements.





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.





**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. With respect to clinical site
      costs, the financial terms of these agreements are subject to negotiation and
      vary from contract to contract. Payments under these contracts may be uneven,
      and depend on factors such as the achievement of certain events, the successful
      accrual of patients, the completion of portions of the clinical trial or similar
      conditions. The objective of the Company’s policy is to match the recording of
      expenses in its financial statements to the actual services received and efforts
      expended. As such, expense accruals related to clinical site costs are
      recognized based on the Company’s estimate of the degree of completion of the
      event or events specified in the specific clinical study or trial contract.





**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.





F-14





On
      January 1, 2007, the Company adopted Financial Accounting Standards Board
      (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes” (“FIN 48”). FIN 48 clarifies the criteria for recognizing tax benefits
      related to uncertain tax positions under SFAS No. 109, “Accounting for Income
      Taxes” (“SFAS No. 109”), and requires additional financial statement disclosure.
      FIN 48 requires that the Company recognize, in its consolidated financial
      statements, the impact of a tax position if that position is more likely than
      not to be sustained upon examination, based on the technical merits of the
      position. Adoption of FIN 48 had no impact on the Company’s consolidated results
      of operations and financial position. Upon adoption, the Company believed there
      were no uncertain tax positions that failed to meet the more likely than not
      recognition threshold under FIN 48 to be sustained upon
      examination.





Prior
      to
      the adoption of FIN 48, the Company included interest accrued on the
      underpayment of income taxes, if any, in selling, general and administrative
      expense. The Company continued to follow this policy following the adoption
      of
      FIN 48.





The
      Company files income tax returns in the U.S. and the statue of limitations
      has
      expired for years prior to 2003. In 2006, the Internal Revenue Service commenced
      an examination of the Company’s U.S. Federal income tax returns for tax years
      2004, 2005 and 2006. The Company believes that the ultimate resolution of this
      tax matter will not have a material impact on the Company’s results of
      operations or financial condition.





The
      Company has filed inactive returns in Israel for its subsidiaries in Israel
      since 2004. These subsidiaries in Israel had ceased operations and are currently
      in the process of being closed down. In 2007, the Israeli tax authorities
      commenced and completed an examination of the Israeli tax returns of one of
      the
      Company’s subsidiaries in Israel for the tax years 2003 through 2006, which
      resulted in a reclassification of the Company’s net operating loss carryforwards
      to a capital loss and a corresponding decrease in valuation allowance.





The
      Company and its subsidiaries file income tax returns in the U.S. federal
      jurisdiction and in various states. The Company has tax net operating loss
      carryforwards that are subject to examination for a number of years beyond
      the
      year in which they may be utilized for tax purposes. Since a portion of these
      net operating loss carryforwards may be utilized in the future, many of these
      net operating loss carryforwards will remain subject to
      examination.





**STOCK
      - BASED COMPENSATION**





In
      December 2004, the 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 beginning
      January 1, 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
      SFAS 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 9 –
Stockholders' Equity.





F-15





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 EITF 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”). Unvested options are revalued at every
      reporting period and amortized over the vesting period in order to determine
      the
      compensation expense.





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.





**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, 2007, 2006 and 2005, which are not included
      in
      the computation of net loss per share amounts, were 11,191,149, 11,071,689
      and
      8,346,628, 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 8 – Contingent Equity Rights)
      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 the recognition of an impairment loss
      when circumstances indicate that the carrying value of long-lived tangible
      and
      intangible assets with finite lives may not be recoverable. Management’s policy
      in determining whether an impairment indicator exists, a triggering event,
      comprises measurable operating performance criteria as well as qualitative
      measures. If an analysis is necessitated by the occurrence of a triggering
      event, the Company makes certain assumptions in determining the impairment
      amount. 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. The Company
      continues to derive revenue from the sale of the Accumin diagnostic tool. During
      the first quarter of 2007, management reviewed both its original and projected
      revenue estimates associated with the diagnostic tool. As a result of this
      analysis, the Company concluded that the asset was impaired and recorded an
      impairment charge of approximately $600,000 to write-down identifiable
      intangible long-lived assets associated with Accumin. The charge was recorded
      in
      other selling, general and administrative expenses within the Diagnostics
      segment.





F-16





The
      Company accounts for impairment of goodwill using the provisions of SFAS No.
      142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). This statement
      addresses how intangible assets that are acquired individually or with a group
      of other assets (but not those acquired in a business combination) should be
      accounted for in financial statements upon their acquisition. This Statement
      also addresses how goodwill and other intangible assets should be accounted
      for
      after they have been initially recognized in the financial statements. 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, 2007, 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. The Company also maintains short-term investments in auction
      note securities. See “Note 3 – Investment Securities.”





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS No. 141R”) which replaces SFAS No. 141. SFAS No. 141R
      changes the accounting for business combinations, including the measurement
      of
      acquirer shares issued in consideration for a business combination, the
      recognition of contingent consideration, the accounting for contingencies,
      the
      recognition of capitalized in-process research and development, the accounting
      for acquisition-related restructuring cost accruals, the treatment of
      acquisition related transaction costs and the recognition of changes in the
      acquirer’s income tax valuation allowance and income tax uncertainties. SFAS No.
      141R applies prospectively to business combinations for which the acquisition
      date is on or after the beginning of the first annual reporting period beginning
      on or after December 15, 2008, and interim periods within those fiscal years.
      Early application is prohibited.





In
      December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB 51,” (“SFAS No. 160”)
      which changes the accounting and reporting for minority interests. Minority
      interests will be recharacterized as noncontrolling interests and will be
      reported as a component of equity separate from the parent’s equity, and
      purchases or sales of equity interests that do not result in a change in control
      will be accounted for as equity transactions. In addition, net income
      attributable to the noncontrolling interest will be included in consolidated
      net
      income on the face of the income statement and, upon a loss of control, the
      interest sold, as well as any interest retained, will be recorded at fair value
      with any gain or loss recognized in earnings. SFAS No. 160 is effective for
      fiscal years (including interim periods within those fiscal years) beginning
      on
      or after December 15, 2008. Earlier adoption is prohibited. The statement shall
      be applied prospectively as of the beginning of the fiscal year in which it
      is
      initially applied, except for the presentation and disclosure requirement which
      shall be applied retrospectively for all periods presented. The Company expects
      that the adoption of SFAS No. 160 will not have a material impact on its results
      of operations and financial position.





In
      December 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for
      Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 defines collaborative
      arrangements and establishes reporting requirements for transactions between
      participants in a collaborative arrangement and between participants in the
      arrangement and third parties. EITF 07-1 also establishes the appropriate income
      statement presentation and classification for joint operating activities and
      payments between participants, as well as the sufficiency of the disclosures
      related to these arrangements. EITF 07-1 is effective for fiscal years beginning
      after December 15, 2008. EITF 07-1 shall be applied using a modified version
      of
      retrospective transition for those arrangements in place at the effective date.
      An entity should report the effects of applying this Issue as a change in
      accounting principle through retrospective application to all prior periods
      presented for all arrangements existing as of the effective date, unless it
      is
      impracticable to apply the effects the change retrospectively. The Company
      is
      currently assessing the impact that EITF 07-1 may have on its results of
      operations and financial position.





F-17





In
      June
      2007, the EITF reached a consensus on EITF Issue No. 07-3, “Accounting for
      Nonrefundable Advance Payments for Goods or Services Received to Be Used in
      Future Research and Development Activities” (“EITF 07-3”). EITF No. 07-3
      requires that nonrefundable advance payments for goods or services that will
      be
      used or rendered for future research and development activities be deferred
      and
      amortized over the period that the goods are delivered or the related services
      are performed, subject to an assessment of recoverability. The provisions of
      EITF 07-3 will be effective for financial statements issued for fiscal years
      beginning after December 15, 2007, and interim periods within those fiscal
      years. Early application is prohibited. The provisions of this EITF are
      applicable for new contracts entered into on or after the effective date. The
      Company expects that the adoption of EITF 07-3 will not have a material impact
      on its results of operations and financial position.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - including an amendment of FASB
      Statement No. 115” (“SFAS 159”). SFAS 159 is expected to expand the use of fair
      value accounting, but does not affect existing standards which require certain
      assets or liabilities to be carried at fair value. The objective of SFAS 159
      is
      to improve financial reporting by providing companies with the opportunity
      to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. Under SFAS 159, a company may choose, at its initial application
      or
      at other specified election dates, to measure eligible items at fair value
      and
      report unrealized gains and losses on items for which the fair value option
      has
      been elected in earnings at each subsequent reporting date. SFAS 159 is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. Were the
      Company to elect the fair value option for its existing assets and liabilities,
      the effect as of the adoption date, shall be reported as a cumulative-effect
      adjustment to the opening balance of retained earnings. The Company does not
      expect to elect the fair value option to its existing assets and liabilities
      and
      thus the adoption of SFAS 159 will not have a material impact on its results
      of
      operations and financial position.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”), which provides guidance for using fair value to measure assets and
      liabilities. SFAS 157 will apply whenever another standard requires (or permits)
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value to any new circumstances. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. In February 2008, the FASB
      deferred the effective date of SFAS 157 for one year for certain non financial
      assets and non financial liabilities that are recognized or disclosed at fair
      value in the financial statements on a nonrecurring basis. The Company does
      not
      expect the adoption of SFAS 157 to have a material impact on its results of
      operations and financial position.





**NOTE
      2**–**CASH AND CASH EQUIVALENTS**





(in
                thousands)
            
            **December 31, 2007**
            
            **December 31, 2006**Money
                market funds
            
            $
            14,457
            
            $
            14,733Checking
                and bank deposits
            
            
            4,608
            
            
            34,003Total
            
            $
            19,065
            
            $
            48,736





**NOTE
      3 - INVESTMENT SECURITIES**





The
      following tables summarize the Company’s investment securities at December 31,
      2007 and December 31, 2006 (regarding assumptions used for estimating fair
      value, see “Note 10 – Fair Value of Financial Instruments.”):





**December
                  31,
                  2007**(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 April and October
                  2008)
                  (Held-to-maturity)
              
              $
              20,838
              
              $
              91
              
              $
              —
              
              $
              20,929Auction
                  notes (Available-for-sale) *
              
              
              22,200
              
              
              —
              
              
              —
              
              
              22,200$
              43,038
              
              $
              91
              
              $
              —
              
              $
              43,129Long-term
                  investments:Obligations
                  of domestic governmental agencies (mature May 2009)
                  (Held-to-maturity)
              
              $
              2,296
              
              $
              54
              
              $
              —
              
              $
              2,350





F-18




**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





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





As
      of
      December 31, 2007, $22.2 million of the Company’s investment securities are
      invested in auction note securities. The Company’s auction note securities are
      public securities with long-term nominal maturities for which the interest
      rates
      are reset through a dutch auction each month. The monthly auctions historically
      have provided a liquid market for these securities. The Company’s investments in
      auction note securities represent interests in student loan-backed securities.
      Consistent with the Company’s investment policy guidelines, its auction note
      securities all had “triple A” credit ratings at the time of purchase.





As
      of
      February 22, 2008, $12.0 million of the Company’s investment securities are
      invested in auction note securities, $5.0 million of which were held at December
      31, 2007 and have repriced in successful auctions. Global credit and capital
      markets are increasingly experiencing liquidity issues. None of the Company’s
      auction note securities held at December 31, 2007, failed an auction in 2007
      or
      2008; however, a $3 million investment the Company made in January 2008 failed
      two auctions held in February 2008, as the amount of securities submitted for
      sale has exceeded the amount of purchase orders. The Company will continue
      to
      attempt to sell this $3 million investment security every seven days until
      an
      auction is successful. The Company’s other $9 million of investments in auction
      note securities have their next scheduled auction dates in March 2008. As of
      December 31, 2007, the Company has not recorded any losses or impairment charges
      related to its auction note securities since there was no temporary or
      other-than-temporary decline in value in the securities in either 2007 or 2008.





If
      uncertainties in the credit and capital markets continue, these markets
      deteriorate further or the Company experiences any ratings downgrades on the
      auction note securities in its portfolio, the Company may incur impairments
      to
      its investment portfolio, which could negatively affect its financial condition,
      cash flow and reported earnings, and the lack of liquidity of its auction note
      securities could have a material impact on the Company’s financial flexibility
      and ability to fund its operations.





F-19





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





(in thousands)
            
            **December 31, 2007**
            
            **December 31, 2006**Manufacturing
                suite and equipment
            
            $
            11,224
            
            $
            8,162Lab
                equipment
            
            
            19
            
            
            38Leasehold
                improvements
            
            
            36
            
            
            16Office
                furniture and equipment
            
            
            315
            
            
            311Computers,
                software and related equipment
            
            
            391
            
            
            31811,985
            
            
            8,845Accumulated
                depreciation and amortization
            
            
            (488
            )
            
            (356
            )Net
                book value
            
            $
            11,497
            
            $
            8,489





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.





Depreciation
      expense for the years ended December 31, 2007, 2006 and 2005 was approximately
      $137,000, $139,000 and $102,000, respectively. The following table summarizes
      depreciation expense for the years ended December 31, 2007, 2006 and 2005.





**For the year ended December 31**(in
                thousands)
            
            **2007**
            
            **2006**
            
            **2005**Depreciation
                expense:Cost
                of services
            
            $
            —
            
            $
            2
            
            $
            4Research
                and development
            
            
            92
            
            
            90
            
            
            72General
                and administrative
            
            
            45
            
            
            47
            
            
            26Total
            
            $
            137
            
            $
            139
            
            $
            102





**NOTE
      5 - OTHER ASSETS**





(in thousands)
            
            **December 31, 2007**
            
            **December 31, 2006**Patents
                and other intangible assets
            
            $
            352
            
            $
            1,007Long-term
                deposits
            
            
            322
            
            
            322Deferred
                registration fees
            
            
            22
            
            
            22696
            
            
            1,351Accumulated
                amortization
            
            
            (352
            )
            
            (393
            )$
            344
            
            $
            958





Amortization
      expense for the years ended December 31, 2007, 2006 and 2005 was approximately
      $14,000, $84,000 and $88,000, respectively. The Company does not expect to
      record amortization expenses going forward, as all intangible assets are fully
      amortized. In addition, for the year ended December 31, 2007, the Company
      recorded an impairment charge in the amount of $600,000 related to certain
      intangibles associated with Accumin’s diagnostic product.





**NOTE
      6 –** **ACQUISITION**





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 could help increase the Company’s
      exposure to physicians that treat diabetes, the target market for Sulonex,
      by,
      among other things, highlighting the need for and importance of early detection
      of microalbuminuria, which, if successful, could ultimately improve market
      perception and utilization of Sulonex. This acquisition also provided the
      Company with an incidental revenue stream associated with Accumin’s diagnostic
      tool.




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 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 Food and Drug Administration
      marketing approval. 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”). On the Effective
      Date, 245,024 shares were released from escrow to AusAm.





F-20





Subsequent
      to the closing, disputes arose between AusAm and Keryx relating to the
      determination of the purchase consideration under the acquisition
      agreement. On July 31, 2006, AusAm 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.)). The matter has been settled pursuant
      to a settlement agreement approved by the Bankruptcy Court on April 10, 2007.
      In
      April 2007, under the settlement, Keryx paid AusAm $110,075 in full settlement
      of all claims made by AusAm in the action. Following completion of the
      settlement, 15,646 shares of the Company’s common stock, which were issued and
      outstanding and held in escrow, were canceled.





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.





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 cash settlement costs
            
            
            
            
            
            341Total
                purchase price
            
            
            
            
            $
            3,996





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 based on the proposed synergies associated
      with Sulonex.





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: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.





F-21





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.





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” the Company recognizes an impairment loss when circumstances
      indicate that the carrying value of long-lived tangible and intangible assets
      with finite lives may not be recoverable. Management reviews various
      quantitative and qualitative factors in determining whether an impairment
      indicator exists, a triggering event. If an analysis is necessitated by the
      occurrence of a triggering event, the Company makes certain assumptions in
      determining the impairment amount. 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. The Company continues to derive incidental
      revenue from the sale of the Accumin diagnostic tool. During the first quarter
      of 2007, management reviewed both its original and projected revenue estimates
      associated with the diagnostic tool. As a result of the projected cash flows
      of
      the diagnostic tool, the Company concluded that the intangible asset was
      impaired and recorded an impairment charge of approximately $600,000 to
      write-down identifiable intangible long-lived assets associated with Accumin.
      The charge was recorded in other selling, general and administrative expenses
      within the Diagnostics segment.





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





**NOTE
      7 - LICENSE AGREEMENTS**





In
      September 2007, the Company entered into a licensing agreement with Japan
      Tobacco Inc. (“JT”) and Torii Pharmaceutical Co., Ltd. (“Torii”), JT's
      pharmaceutical business subsidiary, under which JT and Torii obtained the
      exclusive rights for the development and commercialization of Zerenex in Japan.
      JT and Torii will be responsible for the future development and
      commercialization costs in Japan. An upfront payment of $12.0 million, which
      was
      received in October 2007, is being recognized as license revenue on a
      straight-line basis over the life of the agreement, which is through the
      expiration of the last-to-expire patent covered by the agreement in 2023, and
      represents the estimated period over which the Company will have significant
      responsibilities under the license agreement. As of December 31, 2007, the
      Company has recognized approximately $204,000 of license revenue. At December
      31, 2007, the Company had deferred revenue of approximately $11.8 million
      (approximately $774,000 of which has been classified as a current liability)
      associated with this license agreement. The Company may receive up to an
      additional $88.0 million in up-front license fees and payments upon the
      achievement of pre-specified milestones. In addition, upon commercialization,
      JT
      and Torii will make royalty payments to the Company on net sales of Zerenex
      in
      Japan.





In
      October 2004, the Company entered into a termination agreement with Yissum
      Research and Development Company of the Hebrew University of Jerusalem
      (“Yissum”), whereby in consideration for the Company’s agreement to a
      termination of certain license rights, Yissum agreed to pay the Company thirty
      three and one-third percent of any cash consideration received by Yissum
      relating to the terminated license rights, up to $6.0 million. In December
      2007,
      the Company recognized $726,600 of other revenue, which was received net of
      $36,330 of income
      tax withheld, related
      to this termination agreement. Payments from Yissum are recognized as earned
      since the Company has no responsibilities under the terminated license agreement
      or the termination agreement.





F-22





**NOTE
      8 – CONTINGENT EQUITY RIGHTS**





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 3 (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.
      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).





F-23





**NOTE
      9 - STOCKHOLDERS’ EQUITY**





***Preferred
      Stock***





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





***Common
      Stock***





On
      June
      20, 2007, at the 2007 Annual Meeting of Stockholders, the Company’s stockholders
      approved an amendment to the Company’s amended and restated certificate of
      incorporation increasing the shares of authorized common stock from 60,000,000
      shares to 95,000,000 shares.





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.





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. (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 8 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-24





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.





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





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.





***Treasury
      Stock***





On
      February 14, 2007, our former Chief Financial Officer surrendered to the Company
      5,973 shares of common stock in order to satisfy his tax withholding obligation
      upon the vesting of 16,666 shares of restricted stock. The 5,973 shares of
      common stock are being held by the Company in Treasury, at a cost of
      approximately $70,000, representing the fair market value on the date the shares
      were surrendered.





On
      April
      25, 2007, our President surrendered to the Company 17,875 shares of common
      stock
      in order to satisfy his tax withholding obligation upon the vesting of 50,000
      shares of restricted stock. The 17,875 shares of common stock are being held
      by
      the Company in Treasury, at a cost of approximately $198,000, representing
      the
      fair market value on the date the shares were surrendered.





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.




***Equity
      Incentive Plans***





The
      Company has in effect the following stock option and incentive plans.





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, 2007, up to 64,379 additional shares may be issued under the 2000
      Stock Option Plan.





F-25





c.
      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, 2007, 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.





d.
      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,
      2007, 500,000 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.





e.
      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, 2007, up to an additional 222,810 shares may
      be
      issued under the 2004 Long-Term Incentive Plan.





f.
      The
      2007 Chief Accounting Officer Inducement Stock Option Plan (the “2007 CAO Plan”)
      was adopted in March 2007. Under the 2007 CAO Plan, the Company’s board of
      directors granted an option to the newly-appointed Chief Accounting Officer
      of
      the Company to purchase up to 100,000 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 Accounting Officer was made pursuant to
      an
      employment arrangement. Of these options, 25,000 vest on the one-year
      anniversary of employment and 6,250 vest every three months following the
      one-year anniversary of employment, until the 48 th month of
      employment. No additional shares of our common stock may be issued under the
      2007 CAO Plan.





g.
      The
      2007 General Counsel Incentive Stock Option Plan (the “2007 GC Plan”) was
      adopted in April 2007. Under the 2007 GC Plan, the Company’s board of directors
      granted an option to the newly-appointed General Counsel of the Company to
      purchase up to 150,000 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 General Counsel was made pursuant to an employment
      arrangement. Of these options, 37,500 vest on the one-year anniversary of
      employment and 9,375 vest every three months following the one-year anniversary
      of employment, until the 48 th month of
      employment. No additional shares of our common stock may be issued under the
      2007 GC Plan.





h.
      The
      2007 Incentive Plan was adopted in June 2007 by our stockholders. Under the
      2007
      Incentive Plan, the compensation committee of the Company’s board of directors
      is authorized to grant stock-based awards to directors, consultants, employees
      and officers. The 2007 Incentive Plan authorizes grants to purchase up to
      6,000,000 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, 2007, up to an additional 5,220,431 shares may be issued under
      the
      2007 Incentive Plan.





F-26





The
      following table summarizes stock option activity for the year ended December
      31,
      2007:





**Number**
              **of
                shares**
            
            **Weighted-**
              **average**
              **exercise
                price**
            
            **Weighted-**
              **average**
              **Contractual**
              **Term**
            
            **Aggregate**
              **Intrinsic**
              **Value****(in
                years)**
            
            **(in
                millions)**Outstanding
                at December 31, 2006
            
            
            10,784,713
            
            $
            7.87Granted
            
            
            1,235,769
            
            
            9.67Exercised
            
            
            (138,412
            )
            
            1.96
            
            
            
            
            $
            1.3Forfeited
            
            
            (544,730
            )
            
            14.48Expired
            
            
            (468,167
            )
            
            11.31Outstanding
                at December 31, 2007
            
            
            10,869,173
            
            $
            7.69
            
            
            6.9
            
            $
            31.1Vested
                and expected to vest at December 31, 2007
            
            
            10,768,822
            
            $
            7.65
            
            
            6.9
            
            $
            31.1Exercisable
                at December 31, 2007
            
            
            7,306,546
            
            $
            5.71
            
            
            6.2
            
            $
            31.1





The
      following table summarizes information about stock options outstanding at
      December 31, 2007:




**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 - $ 2.14
              
              
              4,175,987
              
              
              5.7
              
              $
              1.24
              
              
              4,175,987
              
              $
              1.243.01 -    8.98
              
              
              926,599
              
              
              8.3
              
              
              7.18
              
              
              346,911
              
              
              5.029.25 - 
                  12.81
              
              
              2,890,878
              
              
              7.1
              
              
              10.47
              
              
              1,432,998
              
              
              10.6413.00
                  -  18.06
              
              
              2,875,709
              
              
              8.2
              
              
              14.42
              
              
              1,350,650
              
              
              14.50$
                  0.10 -$18.06
              
              
              10,869,173
              
              
              6.9
              
              $
              7.69
              
              
              7,306,546
              
              $
              5.71





Upon
      the
      exercise of stock options, the Company issues new shares. As of December 31,
      2007, 3,453,833 options issued to employees and directors, and 93,000 options
      issued to consultants, are milestone-based, of which 3,218,833 options issued
      to
      employees and directors, and 43,000 options issued to consultants, are vested
      and exercisable.





Certain
      employees and consultants have been awarded restricted stock under the 2004
      Long-Term Incentive Plan and 2007 Incentive Plan. The restricted stock vests
      primarily over a period of two to four years. The following table summarizes
      restricted share activity for the year ended December 31, 2007:





**Number
                of**
              **Shares**
            
            **Weighted**
              **Average**
              **Grant
                Date**
              **Fair
                Value**
            
            **Aggregate**
              **Intrinsic**
              **Value****(in millions)**Outstanding
                at December 31, 2006
            
            
            100,000
            
            $
            15.30Granted
            
            
            195,000
            
            
            10.28Vested
            
            
            (73,332
            )
            
            11.77
            
            $
            0.8Forfeited
            
            
            (83,334
            )
            
            15.30Outstanding
                at December 31, 2007
            
            
            138,334
            
            $
            10.09
            
            $
            1.2





Shares
      available for the issuance of stock options or other stock based awards under
      our stock option and incentive plans were 5,507,620 at December 31,
      2007.





F-27







***Warrants***





**Warrants**
            
            **Weighted-**
              **average**
              **exercise price**
            
            **Aggregate**
              **Intrinsic**
              **Value****(in
                millions)**Outstanding
                at December 31, 2006
            
            
            321,976
            
            $
            4.65Issued
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            $
            —Canceled
            
            
            —
            
            
            —Outstanding
                at December 31, 2007
            
            
            321,976
            
            $
            4.65
            
            $
            1.2





As
      of
      December 31, 2007, 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, 2007 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
              
              
              2.0
              
              $
              0.01
              
              
              72,564
              
              $
              0.016.00
              
              
              249,412
              
              
              0.9
              
              
              6.00
              
              
              249,412
              
              
              6.00321,976
              
              
              1.1
              
              $
              4.65
              
              
              321,976
              
              $
              4.65





***Stock-Based
      Compensation***





The
      fair
      value of stock options granted was estimated at the date of grant 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.




**Black-Scholes
                  Option Valuation Assumptions**
              
              **2007**
              
              **2006**
              
              **2005**Risk-free
                  interest rates
              
              
              4.1%
              
              
              4.7%
              
              
              3.7%Dividend
                  yield
              
              
              —
              
              
              —
              
              
              —Volatility
              
              
              68.4%
              
              
              78.3%
              
              
              84.9%Weighted-average
                  expected term
              
              
              4.8
                  years
              
              
              3.1
                  years
              
              
              4.9
                  years





The
      weighted average grant date fair value of options granted was $5.69, $7.79
      and
      $7.84 for the years ended December 31, 2007, 2006 and 2005, respectively. The
      Company used historical information to estimate forfeitures within the valuation
      model. As of December 31, 2007, there was $17.3 million and $1.1 million of
      total unrecognized compensation cost related to non-vested stock options and
      restricted stock, respectively, which is expected to be recognized over a
      weighted-average period of 2.5 years and 1.8 years, respectively. The amounts
      do
      not include, as of December 31, 2007, 285,000 options outstanding, which are
      milestone-based and vest upon certain corporate milestones, such as FDA approval
      of our drug candidates and market capitalization targets. Stock-based
      compensation will be measured and recorded if and when a milestone
      occurs.





The
      following table summarizes stock-based compensation expense information about
      stock options, restricted stock and warrants for the years ended December 31,
      2007 and 2006:





**Year
                  ended**
              
              **Year
                  ended**(in
                  thousands)
              
              **December 31, 2007**
              
              **December 31, 2006**Stock-based
                  compensation expense associated with restricted stock
              
              $
              1,028
              
              $
              189Stock-based
                  compensation expense associated with option grants +
              
              
              9,632
              
              
              14,723Stock-based
                  compensation expense associated with warrants
              
              
              —
              
              
              —$
              10,660
              
              $
              14,912




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


F-28





Prior
      to
      January 1, 2006, the Company applied the intrinsic value-based method of
      accounting prescribed by 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 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 SFAS 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**
                **stage through**
                **December 31,**(in thousands, except
                  per share amounts)
              
              **2005**
              
              **2005**Net
                  loss, as reported
              
              $
              (26,895
              )
              $
              (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
              
              
              10,179Deduct:
                  Stock-based compensation expense to employees and directors determined
                  under fair value based method
              
              
              (3,797
              )
              
              (20,216
              )Pro
                  forma net loss
              
              $
              (30,247
              )
              $
              (124,485
              )Basic
                  and diluted loss per common share:As
                  reported
              
              $
              (0.78
              )
              $
              (6.34
              )Pro
                  forma
              
              $
              (0.88
              )
              $
              (6.89
              )





For
      the
      year ended December 31, 2005, the Company did not record any stock-based
      compensation expense related to its warrants or restricted stock, as all
      warrants were vested and no shares of restricted stock were outstanding.
      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
      or
      shares of restricted stock were issued in 2005.





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





The
      Company’s financial instruments at December 31, 2007 and 2006 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.





F-29





**NOTE
      11 – INCOME TAXES**





As
      of
      December 31, 2007, the Company has U.S. net operating loss carryforwards of
      approximately $210 million which expire from 2019 through 2027. 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 $119.2 million and $95.0 million as of December 31, 2007 and 2006,
      respectively. At December 31, 2007, deferred tax assets have not been recorded
      on net operating loss carryforwards for certain stock option deductions of
      $4.7
      million. If the entire deferred tax asset were realized, $15.1 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 could be subject to annual limitations imposed by Internal Revenue
      Code Section 382 relating to the change of control provision.





The
      tax
      expense reported during the development stage primarily related to the
      subsidiaries in Israel. The Company recorded
      $36,000 in income tax expense for the year ended December 31, 2007, as a result
      of income tax withheld associated with the Yissum revenue (see Note
      7). No
      income tax expense was attributable to income from continuing operations for
      the
      years ended December 31, 2006 and 2005, 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)
            
            **2007**
            
            **2006**
            
            **2005**Losses
                before taxes on income, as reported in the consolidated statements
                of
                operations
            
            $
            (90,026
            )
            $
            (73,764
            )
            $
            (26,895
            )Computed
                “expected” tax benefit
            
            
            (31,509
            )
            
            (25,817
            )
            
            (9,413
            )Increase
                (decrease) in income taxes resulting from:Expected
                benefit from state & local taxes
            
            
            (4,624
            )
            
            (8,154
            )
            
            (3,379
            )Change
                in state and local effective tax rate
            
            
            4,555
            
            
            (831
            )
            
            (3,130
            )Unrecognized
                compensation deduction
            
            
            7,053
            
            
            —
            
            
            —Permanent
                differences
            
            
            447
            
            
            1,067
            
            
            (571
            )Witholding
                tax
            
            
            36
            
            
            —
            
            
            —Other
            
            
            159
            
            
            —
            
            
            —Change
                in the balance of the valuation allowance for deferred tax assets
                allocated to income tax expense
            
            
            23,919
            
            
            33,735
            
            
            16,493$
            36
            
            $
            —
            
            $
            —





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)
            
            **2007**
            
            **2006**
            
            **2005**Deferred
                tax benefit
            
            $
            (24,186
            )
            $
            (37,129
            )
            $
            (18,931
            )Federal
                deferred tax benefit relating to the exercise of stock
                options
            
            
            267
            
            
            3,394
            
            
            2,438Increase
                in the valuation allowance for deferred tax assets
            
            
            23,919
            
            
            33,735
            
            
            16,493$
            —
            
            $
            —
            
            $
            —





F-30


The
        tax
        effects of temporary differences that give rise to significant portions of
        the
        deferred tax assets and deferred tax liabilities at December 31, 2007 and
        2006
        are presented below.
 
 (in
                  thousands)
              
              **December
                  31, 2007**
              
              **December
                  31, 2006**Deferred
                  tax assets/(liabilities):Net
                  operating loss carryforwards
              
              $
              94,315
              
              $
              78,235Net
                  operating loss carryforwards (ACCESS Oncology)
              
              
              6,128
              
              
              6,128Non-cash
                  compensation
              
              
              10,980
              
              
              7,843Deferred
                  revenue
              
              
              5,069
              
              
              —Research
                  and development
              
              
              1,397
              
              
              1,977Intangible
                  assets due to different amortization methods
              
              
              1,203
              
              
              730Accrued
                  compensation
              
              
              30
              
              
              19Other
                  temporary differences
              
              
              67
              
              
              72Net
                  deferred tax asset, excluding valuation allowance
              
              
              119,189
              
              
              95,004Less
                  valuation allowance
              
              
              (119,189
              )
              
              (95,004
              )Net
                  deferred tax assets
              
              $
              —
              
              $
              —
 
 The
        Company’s tax returns for the fiscal years ended December 31, 2004, 2005,
        and 2006 are currently under examination by the IRS. The Company is also
        subject
        to audits by various state and foreign taxing authorities. The Company regularly
        reevaluates its tax positions and the associated interest and penalties,
        if
        applicable, resulting from audits of federal, state and foreign income tax
        filings, as well as changes in tax law that would reduce the technical merits
        of
        the position to below more likely than not. Unrecognized tax benefits arise
        when
        the estimated benefit recorded in the financial statements differs from the
        amounts taken, or expected to be taken, in a tax return because of the
        uncertainties described above. The Company’s balance of unrecognized tax
        benefits is $7.05 million at December 31, 2007 and relates primarily to
        deductions taken in 2004 and 2005 for compensation expense of certain former
        foreign employees. If recognized, these unrecognized tax benefits would have
        no
        net impact, as they would be fully reserved by a valuation allowance. The
        Company expects a settlement of its December 31, 2007 uncertain tax benefit
        balance within the next twelve months.
 
 The
        Company accounts for
        interest and penalties related
        to uncertain tax positions ,
        if any,
        in selling, general and administrative expense .
        As of December 31, 2007 the Company has not accrued any interest and
        penalties.


F-31


**NOTE
      12 – INTEREST AND OTHER INCOME, NET**





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






**For
                  the year ended December 31,**(in
                  thousands)
              
              **2007**
              
              **2006**
              
              **2005**Interest
                  income
              
              $
              4,550
              
              $
              6,378
              
              $
              2,317Other
                  income
              
              
              5
              
              
              15
              
              
              —$
              4,555
              
              $
              6,393
              
              $
              2,317





In
      2007
      and 2006, other income consisted of rental income from a related-party that
      terminated in 2007.





**NOTE
      13 - COMMITMENTS AND CONTINGENCIES**





**Research
      & Development Agreements**





The
      Company has entered into various research and development agreements ( primarily
      relating to the Company’s pivotal Phase 3 and Phase 4 clinical program for
      Sulonex ) under
      which it is obligated to make payments of approximately $46,529,000 through
      December 2010. The following table shows future research and development payment
      obligations by period as of December 31, 2007.





(in
                thousands)
            
            2008
            
            2009
            
            2010
            
            2011
            
            2012Research
                and development agreements
            
            $
            23,910
            
            $
            19,210
            
            $
            3,409
            
            
            —
            
            
            —





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 $723,000, $658,000 and $514,000 for
      the
      years ended December 31, 2007, 2006, and 2005, respectively.





Future
      minimum lease commitments as of December 31, 2007, in the aggregate total
      approximately $1,780,000 through 2010. The following table shows future minimum
      lease commitments by period as of December 31, 2007.





(in
                thousands)
            
            2008
            
            2009
            
            2010
            
            2011
            
            2012Operating
                leases
            
            $
            724
            
            $
            597
            
            $
            459
            
            
            —
            
            
            —





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 $65,000, $49,000 and $48,000 in 2007, 2006 and 2005,
      respectively, pursuant to the terms of this arrangement, which $28,000 and
      $44,000 have been included in accounts payable and accrued expenses in the
      accompanying balance sheets as of December 31, 2007 and 2006, respectively.
      The
      2005 and 2006 amounts have been paid. Of the 2007 amount, $28,000 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
      Company has undertaken to make contingent milestone payments to certain of
      our
      licensors of up to approximately $93.8 million over the life of the licenses,
      of
      which approximately $74.5 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 three licensors $50,000,
      $75,000, and $22,500, respectively, annually until the licenses expire. As
      of
      December 31, 2007, the Company has recorded a total of approximately $8.1
      million 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
      8 –
Contingent Equity Rights). 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.


F-32


**NOTE 1** **4 –
      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
      15 – 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, and also includes license revenue, other revenue and associated costs.





Segment
      information for the years ended December 31, 2007, 2006 and 2005 was as
      follows:


**Revenue****Amounts
                  accumulated during the development**(in
                  thousands)
              
              **2007**
              
              **2006**
              
              **2005**
              
              **Stage**Diagnostics
              
              $
              66
              
              $
              103
              
              $
              —
              
              $
              169Services
              
              
              52
              
              
              431
              
              
              574
              
              
              1,866Products
              
              
              931
              
              
              —
              
              
              —
              
              
              931Total
              
              $
              1,049
              
              $
              534
              
              $
              574
              
              $
              2,966
 
 **Operating
                  loss****Amounts
                  accumulated**
                **during
                  the development**(in
                  thousands)
              
              **2007**
              
              **2006**
              
              **2005**
              
              **Stage**Diagnostics
              
              $
              (756
              )
              $
              (1,016
              )
              $
              —
              
              $
              (1,772
              )Services
              
              
              (72
              )
              
              41
              
              
              (245
              )
              
              (302
              )Products
              
              
              (93,753
              )
              
              (79,182
              )
              
              (28,967
              )
              
              (293,590
              )Total
              
              $
              (94,581
              )
              $
              (80,157
              )
              $
              (29,212
              )
              $
              (295,664
              )
 
 F-33


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)
              
              **2007**
              
              **2006**
              
              **2005**
              
              **Stage**Operating
                  losses of reportable segments
              
              $
              (94,581
              )
              $
              (80,157
              )
              $
              (29,212
              )
              $
              (295,664
              )Interest
                  and other income
              
              
              4,555
              
              
              6,393
              
              
              2,317
              
              
              17,917Income
                  taxes
              
              
              (36
              )
              
              —
              
              
              —
              
              
              (527
              )Consolidated
                  net loss
              
              $
              (90,062
              )
              $
              (73,764
              )
              $
              (26,895
              )
              $
              (278,274
              )
 
 **Assets
                  (1)****As
                  of December 31,**(in
                  thousands)
              
              **2007**
              
              **2006**Diagnostics
              
              $
              87
              
              $
              734Services
              
              
              —
              
              
              116Products
              
              
              16,293
              
              
              13,853Total
                  assets of reportable segments
              
              
              16,380
              
              
              14,703Cash
                  and cash equivalents (2)
              
              
              64,681
              
              
              125,610Consolidated
                  total assets
              
              $
              81,061
              
              $
              140,313
 (1)
              Assets
                  for our reportable segments include fixed and intangible assets,
                  including
                  goodwill, as well as accounts receivable and
                  inventory.
 (2)
              Includes
                  cash, cash equivalents, interest receivable and investment securities.
 
 The
        carrying amount of goodwill by reportable segment as of December 31, 2007
        and
        2006 was as follows:
 
 **Goodwill**(in
                  thousands)
              
              **December 31, 2007**
              
              **December 31, 2006**Diagnostics
              
              
              —
              
              
              —Services
              
              
              —
              
              
              —Products
              
              $
              3,208
              
              $
              3,208Total
              
              $
              3,208
              
              $
              3,208




As
      of
      December 31, 2007, management concluded that there is no impairment to its
      goodwill.





**NOTE
      16 - 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 $1,208,000, 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. On October
      15, 2006, the Court held that the service of the claim against Mr. Weiss is
      vacated. Consequently, the Circuit Court of Jerusalem dismissed the suit against
      Mr. Weiss. However, the service against the Company was sustained. The Company
      appealed this holding. The appeal was denied on June 18, 2007, and the Company
      filed a petition for certiorari to the Supreme Court of Israel. The Company’s
      motion for certiorari was denied as well. The next preliminary hearing is
      scheduled for February 28, 2008. 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





The
      Company is engaged in an arbitration proceeding with Alfa Wasserman concerning
      certain terms of the License Agreement related to the provision of data to
      Alfa
      Wasserman and consultation regarding management of the licensed patents. An
      arbitration proceeding was held in October 2007 and the Company is awaiting
      decision from the arbitrator. The outcome of the arbitration should not affect
      the validity of the license, but whether the Company is required to share data
      with Alfa Wasserman for that company’s use outside of the Company’s licensed
      territories and its ongoing management of the licensed patent portfolio. Alfa
      Wasserman also seeks unspecified damages. If the arbitrator determines that
      the
      Company owes Alfa Wasserman the data, and that failure to deliver such data
      constitutes a material breach of the License Agreement, then the Company will
      have 28 days to cure such breach following the final arbitration decision by
      delivering any data required to be provided. Failure to cure would entitle
      Alfa
      Wasserman to terminate the License Agreement.





In
      November 2007, the Company initiated an action in the US District Court for
      the
      Southern District of New York against Panion to enjoin Panion from improperly
      terminating the November 2005 License Agreement for an alleged breach of
      contract by Keryx related to certain manufacturing provisions of the agreement,
      to enjoin Panion from interfering with Keryx’s contractual relationships with
      certain third-parties, as well as to enforce Keryx’s right with respect to the
      prosecution of certain patents. On November 27, 2007, the Court granted Keryx’s
      motion for a preliminary injunction. Panion has since asserted counterclaims
      for
      breach of contract relating to certain manufacturing provisions of the license
      agreement and the parties have reached a tentative agreement to settle the
      litigation. If the parties are unable to resolve the matter by a settlement,
      the
      Company will proceed with the action to resolve the parties’ respective claims,
      in which event Keryx will incur significant legal expenses. The matter is
      currently scheduled for trial in the second half of 2008. In the event that
      Keryx is found to be in breach of contract, it will have thirty days in which
      to
      cure such breach before Panion can terminate the agreement based on the alleged
      breach.





**NOTE
      17 – QUARTERLY CONSOLIDATED FINANCIAL DATA
      (UNAUDITED)**




**2007****Mar.
                  31**
              
              **June
                  30**
              
              **Sept.
                  30**
              
              **Dec.
                  31**(in
                  thousands, except per share data)**Revenue:**License
                  revenue
              
              $
              —
              
              $
              —
              
              $
              41
              
              $
              163Diagnostic
                  revenue
              
              
              30
              
              
              36
              
              
              —
              
              
              —Service
                  revenue
              
              
              12
              
              
              14
              
              
              11
              
              
              15Other
                  revenue
              
              
              —
              
              
              —
              
              
              —
              
              
              727**Total
                  revenue**
              
              
              42
              
              
              50
              
              
              52
              
              
              905**Operating
                  expenses:**Cost
                  of diagnostics sold
              
              
              22
              
              
              16
              
              
              —
              
              
              —Cost
                  of services
              
              
              32
              
              
              30
              
              
              28
              
              
              34Research
                  and development:Non-cash
                  compensation
              
              
              995
              
              
              1,178
              
              
              735
              
              
              666Other
                  research and development
              
              
              17,446
              
              
              15,685
              
              
              15,967
              
              
              25,791Total
                  research and development
              
              
              18,441
              
              
              16,863
              
              
              16,702
              
              
              26,457Selling,
                  general and administrative:Non-cash
                  compensation
              
              
              2,006
              
              
              1,407
              
              
              1,780
              
              
              1,893Other
                  selling, general and administrative
              
              
              2,795
              
              
              2,394
              
              
              2,087
              
              
              2,643Total
                  selling, general and administrative
              
              
              4,801
              
              
              3,801
              
              
              3,867
              
              
              4,536**Total
                  operating expenses**
              
              
              23,296
              
              
              20,710
              
              
              20,597
              
              
              31,027**Operating
                  loss**
              
              
              (23,254
              )
              
              (20,660
              )
              
              (20,545
              )
              
              (30,122
              )**Other
                  income (expense)**Interest
                  and other income, net
              
              
              1,441
              
              
              1,200
              
              
              1,017
              
              
              897Income
                  taxes
              
              
              —
              
              
              —
              
              
              —
              
              
              36**Net
                  loss**
              
              $
              (21,813
              )
              $
              (19,460
              )
              $
              (19,528
              )
              $
              (29,261
              )**Net
                  loss per common share**Basic
                  and diluted
              
              $
              (0.50
              )
              $
              (0.45
              )
              $
              (0.45
              )
              $
              (0.67
              )
  F-35
 
 **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-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:
      February 27, 2008




**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 Mark Stier, 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 February 27, 2008, and in the capacities indicated:




**Signatures**
              
              **Title**/s/
                  Michael S. Weiss
              
              Chairman
                  and Chief Executive OfficerMichael
                  S. Weiss
              
              (principal
                  executive officer)/s/
                  Mark Stier
              
              Chief
                  Accounting OfficerMark
                  Stier
              
              (principal
                  financial officer)/s/
                  I. Craig Henderson, M.D.
              
              President
                  and DirectorI.
                  Craig Henderson, M.D./s/Kevin
                  Cameron
              
              DirectorKevin
                  Cameron/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./s/Michael
                  P. Tarnok
              
              DirectorMichael
                  P. Tarnok











**EXHIBIT
      INDEX**





**Exhibit****Number**
            
            **Exhibit
                Description**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
                February 27, 2008.31.2
            
            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
                February 27, 2008.32.1
            
            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
                February
                27, 2008.32.2
            
            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
                February
                27, 2008.