**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**x**                               ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the Fiscal Year Ended December 31, 2006**

**OR**

**o**                                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

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

**Commission file number 0-27628**

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**SuperGen, Inc.**

(Exactname of registrant as specified in its charter)

| **Delaware**                                       |   | **91-1841574**         |
|----------------------------------------------------|--------|------------------------|
| (State or other jurisdiction                       |   | (IRS Employer          |
| of incorporation or organization)                  |   | Identification Number) |
| **4140 Dublin Blvd.,  Suite 200, Dublin, CA** |   | **94568**              |
| (Address of principal executive offices)           |   | (Zip Code)             |

 

**Registrant’stelephone number, including area code: **(925) 560-0100

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Securitiesregistered pursuant to Section 12(b) of the Act:

| **Title of each class:**                     | ** ** | **Name of each exchange on which registered:** |
|----------------------------------------------|------------|------------------------------------------------|
| **Common Stock, $0.001 par value per share** |       | **The NASDAQ Stock Market LLC**                |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act. Yes o  No x

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act. Yes o  No x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

Indicateby check mark  if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of the Registrant’s knowledge,in definitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K. o

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

Largeaccelerated filer    o                     Acceleratedfiler    x                     Non-acceleratedfiler    o

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o  No x.

Theaggregate market value of the voting stock held by non-affiliates of theRegistrant (based on the closing sale price of the Common Stock as reported onthe Nasdaq Stock Market on June 30, 2006, the last business day of theRegistrant’s most recently completed second fiscal quarter) was approximately$191,175,298. This determination of affiliate status is not necessarily aconclusive determination for other purposes. The number of outstanding sharesof the Registrant’s Common Stock as of the close of business on March 6,2007 was 55,644,086.

**DOCUMENTS INCORPORATED BY REFERENCE**

Items10, 11, 12, 13 and 14 of Part III incorporate by reference informationfrom the definitive proxy statement for the Registrant’s Annual Meeting ofStockholders to be held on June 14, 2007.

 

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**SUPERGEN, INC.2006  ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS**

|               | ** ** | ** **                                                                                                          | ** ** | **Page** | ** ** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       |                                                                                                                |       |     |       |   |   |
| Item 1.       |       | Business                                                                                                            |       |     | 1          |   |   |
| Item 1A.      |       | Risk Factors                                                                                                        |       |     | 23         |   |   |
| Item  1B.     |       | Unresolved Staff Comments                                                                                           |       |     | 35         |   |   |
| Item 2.       |       | Properties                                                                                                          |       |     | 35         |   |   |
| Item 3.       |       | Legal Proceedings                                                                                                   |       |     | 35         |   |   |
| Item  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 |       |     | 36         |   |   |
| Item  6.      |       | Selected Financial Data                                                                                             |       |     | 38         |   |   |
| Item  7.      |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                         |       |     | 39         |   |   |
| Item  7A.     |       | Quantitative and Qualitative  Disclosures About Market Risk                                                         |       |     | 55         |   |   |
| Item  8.      |       | Financial Statements and  Supplementary Data                                                                        |       |     | 56         |   |   |
| Item  9.      |       | Changes in and Disagreements  with Accountants on Accounting and  Financial Disclosure                              |       |     | 56         |   |   |
| Item  9A.     |       | Controls and Procedures                                                                                             |       |     | 56         |   |   |
| Item 9B.      |       | Other Information                                                                                                   |       |     | 61         |   |   |
| PART III |       |                                                                                                                |       |     |       |   |   |
| Item  10.     |       | Directors,  Executive Officers and Corporate Governance                                                             |       |     | 61         |   |   |
| Item  11.     |       | Executive Compensation                                                                                              |       |     | 62         |   |   |
| Item  12.     |       | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                     |       |     | 63         |   |   |
| Item  13.     |       | Certain Relationships and  Related Transactions, and Director Independence                                          |       |     | 63         |   |   |
| Item  14.     |       | Principal Accounting Fees  and Services                                                                             |       |     | 63         |   |   |
| PART IV  |       |                                                                                                                |       |     |       |   |   |
| Item  15.     |       | Exhibits,  Financial Statement Schedules                                                                            |       |     | 64         |   |   |
| SIGNATURES    |       |                                                                                                                | S-1        |     |       |

 

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**Special NoteRegarding Forward-Looking Statements**

*Our disclosure andanalysis in this report contain forward-looking statements within themeaning of Section 27A of the Securities Act and Section 21E of theExchange Act, and within the meaning of the Private Securities LitigationReform Act of 1995. Forward-looking statements provide our currentexpectations or forecasts of future events. When we use the words “anticipate,”“estimate,” “project,” “intend,” “expect,” “plan,” “believe,” “should,” “likely”and similar expressions, we are making forward-looking statements. In particular, these statements include statementssuch as: our estimates about becoming profitable; our forecasts regarding ourresearch and development expenses; our statements regarding the sufficiency ofour cash to meet our operating needs, and any expectations that EuroGen willgenerate revenue during 2007. Our actual results could differ materially fromthose predicted in the forward-looking statements as a result of risksand uncertainties including, but not limited to, delays and risks associatedwith conducting and managing our clinical trials; developing products andobtaining regulatory approval; ability to establish and maintain collaborationrelationships; competition; ability to obtain funding; ability to protect ourintellectual property; our dependence on third party suppliers; risksassociated with the hiring and loss of key personnel; adverse changes in thespecific markets for our products; and ability to launch and commercialize ourproducts. Certain unknown or immaterial risks and uncertainties can alsoaffect our forward-looking statements. Consequently, no forward-lookingstatement can be guaranteed and you should not rely on these forward-lookingstatements.*

*The forward-looking statements reflect our position asof the date of this report, and we undertake no obligation to update anyforward-looking statements, whether as a result of new information,future events or otherwise. You are advised, however, to consult any furtherdisclosures we make on related subjects in our Quarterly Reports on Form 10-Q,Current Reports on Form 8-K, or other filings. Also note that weprovide a cautionary discussion of risks and uncertainties relevant to ourbusiness under Item 1A—Risk Factors in this report. These are currently knownand material risks that we believe could cause our actual results to differmaterially from expected and historical results. Other unknown and immaterialrisks besides those listed in this report could also adversely affect us.*

**PART I**

**ITEM 1. BUSINESS.**

We incorporated in March 1991as a California corporation and changed our state of incorporation to Delawarein May 1997. Our executive offices are located at 4140 Dublin Blvd., Suite 200,Dublin, CA, 94568 and our telephone number at that address is (925) 560-0100.We maintain a website on the internet atwww.supergen.com. This is a textual reference only. We do notincorporate the information on our website into this annual report on Form 10-K,and you should not consider any information on, or that can be accessedthrough, our website as part of this annual report on Form 10-K.

**Overview**

We are a pharmaceutical company dedicated to thediscovery, development and commercialization of therapies to treat patientswith cancer. Historically we have acquired products that were approved formarket or for clinical investigation and applied additional developmentaleffort to expand sales or advance these products clinically towards potentialapproval for marketing. Three compounds have been the primary focus of ourefforts:  Dacogen® (decitabine) forinjection, OrathecinTM (rubitecan) capsules and Nipent® (pentostatin forinjection). In 2006, Dacogen received approval for marketing in the United States,Orathecin was withdrawn from the regulatory review process, Nipent and ourcommercial infrastructure was sold, and we acquired a discovery and developmentcompany to complement our ongoing licensing efforts. These changes have beenimplemented to mitigate the ongoing risk of competitive in-licensing andmaximize the return on both existing resources and our incoming royalty andmilestone revenue.

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Our new drug application (“NDA”)for Dacogen was approved  by the UnitedStates Food and Drug Administration (“FDA”) on May 3, 2006 for thetreatment of patients with myelodysplastic syndromes (“MDS”). In September 2004,we executed an agreement granting MGI PHARMA Inc. (“MGI”) exclusive worldwiderights to the development, manufacture, commercialization and distribution ofDacogen. MGI has also committed to fund further development costs associatedwith Dacogen on their own at a minimum of $15.0 million over a three yearperiod. In July 2006, MGI executed an agreement to sublicense Dacogen toCilag GmbH, a Johnson & Johnson company, granting exclusivedevelopment and commercialization rights in all territories outside NorthAmerica. Janssen-Cilag companies will be responsible for conducting regulatoryand commercial activities related to Dacogen in all territories outside NorthAmerica, while MGI retains all commercialization rights and responsibility forall activities in the United States, Canada and Mexico.

Nipentis a product that we acquired in 1996 from Warner-Lambert. Nipent isapproved in the U.S. and several European countries for the treatment of hairycell leukemia and was marketed by us in the United States and Europe. We hadcommercialization rights for Nipent, which we marketed directly in the UnitedStates through our sales force and either directly or indirectly in internationalmarkets. On August 22,2006, we closed a transaction with Mayne Pharma (USA), Inc. (“Mayne”),whereby Mayne acquired the North American rights to Nipent and SurfaceSafe®cleaning system. On November 25, 2006, we entered into another AssetAcquisition Agreement with Mayne, pursuant to which Mayne will acquire theremaining worldwide rights to Nipent. The transaction is expected to close inthe first quarter of 2007.

In January 2004 wesubmitted an NDA under accelerated approval procedures to the FDA for Orathecinfor the treatment of pancreatic cancer patients that have failed one or moretherapies. Based on further discussions and feedback with both the FDA andconsultants, we determined the current package for Orathecin was not sufficientto gain approval at this time in the United States and we withdrew the NDA in January 2005.In July 2004, we submitted a marketing authorization to the Europeanregulatory authorities seeking approval of Orathecin. Based on extensivediscussions with the European regulatory authorities, we withdrew theapplication in January 2006. An additional Phase II clinical trial ofOrathecin in combination with gemcitabine in first-line patients with advancedpancreatic cancer was completed and interim results were reported. The resultsof the trial were not robust enough to advance this protocol to a Phase IIIstudy. We are currently exploring alternative development opportunities forOrathecin.

Our current developmentalefforts revolve around the products progressing out of the acquisition ofMontigen Pharmaceuticals, Inc. (“Montigen”), a small-molecule drugdiscovery company, in April 2006. Specifically, two late-stagepre-clinical products, MP-470, a multi-targeted Tyrosine Kinase inhibitor(“TKI”) that may have Rad 51 activity and MP-529, an Aurora-A Kinaseinhibitor, are both targeted for clinical testing in 2007.

**Strategy**

We are a pharmaceuticalcompany dedicated to the discovery, development and commercialization oftherapies to treat patients with cancer. Our founding strategy was to acquirerights to late stage clinical products and commercialize these products byexecuting selective developmental and commercialization strategies that mightallow these products to come into the market and be utilized by the widestpossible patient populations. The competition for late-stage compounds that canbe obtained through licensure or acquisition, that have shown initial efficacyin humans, has increased significantly with most major pharmaceutical companiestaking positions in this market. The acquisition of Montigen mitigates thecompetitive risk of in-licensure and potentially may allow us to out-licenseselective product to our licensing competitors. Our primary objective is tobecome a leading developer and seller of therapies for patients suffering fromcancer. Key elements of our strategy include the following:

*Target,discover and advance into clinical trials one to two products per year.**  *Our drug discovery group has optimized a processcalled CLIMBTM that allows our developmental chemists and biologists to model 

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previously unknown cancertargets. These targets become templates for computerized drug creation anddevelopment. The flexibility and relatively low cost of both human anddevelopmental capital for this type of discovery and development has allowed usto transition from just a licensee to a potential licensor.

*Maintainour global  commercial presence.**  *We believe that the global market opportunity for ourproducts is meaningfully greater than the market opportunity in the UnitedStates alone. Therefore, as our products are ready for clinical development wemay parallel trials in multiple continents. Our European subsidiary, EuroGenPharmaceuticals Ltd. (“EuroGen”) is a business development, registration andmarketing research organization. EuroGen will continue to establish our marketpresence through development of clinical and scientific key opinion leaders aswell as the identification of regional developmental partners that mightdevelop secondary markets for our products.

*Capitalize on our existingclinical expertise and regulatory development to maximize the commercial valueof our products.**  *We haveacquired significant expertise at planning, executing and filing clinical datain both the United States and Europe. The large number of  products in research and development shouldincrease in value to us or to a potential licensee as they proceed through theclinic. Historically, products that are in Phase II trials command a higherselling price than products that are still in Phase I.

**Products inDevelopment**

***MP-470***

MP-470 is a multi-targeted TKI that was designedto be effective in patients that are resistant to Gleevec® (imatinib mesylate).Tyrosine Kinase can modify proteins through the process of adding a phosphategroup at the amino acid residue tyrosine. This can induce a cascade ofsignaling events allowing the cancer cell to accelerate growth. A TKI couldshut down this accelerated growth. Additionally, MP-470 has demonstratedthe ability to inhibit Rad 51. This protein is very important in a cell’sability to repair specific breaks in DNA. Inhibition of Rad 51 will be exploredin the clinic to improve radio-therapy treatments and combination treatmentswith established chemotherapeutics.

We have met with the FDAin a pre-investigational new drug meeting and plan to submit an InvestigationalNew Drug Application (“IND”) and start clinical trials in the first half of2007.

***MP-529***

MP-529****is also asignal transduction inhibitor, but of Aurora-A Kinase. This kinase is known toplay a major role in cell division instability. Aurora-A has been shown to be aspecific oncogene. As an oncogene, its presence can increase the likelihoodthat the cell will become cancerous.

This product is scheduledfor an IND submission in the second half of 2007 and the subsequent initiationof clinical trials.

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***Summary of Product Candidates in Development***

A variety of additionalprojects will progress to products and may lead to two clinical trial positionsper year. The chart below lists the current projects of developmental interest:

**Summary of PastProducts in Development**

***Dacogen***

Dacogen, a pyrimidineanalog that decreases the amount of methylation at certain DNA sites, is anactive therapeutic product that we acquired from Pharmachemie in September 1999.Aberrant DNA methylation has been implicated as a fundamental factor in thedevelopment of all cancers. Researchers have determined that an increase inspecific methylation of DNA can result in blocking the activity of genes,thereby reducing the degree of cellular antigen expression and potentiallycausing chemotherapy resistance. In clinical studies, researchers havedemonstrated that Dacogen can reverse the methylation of DNA, potentiallyleading to re-expression of genes and a resulting re-differentiation and maturationof the cancer cells back to pre-cancer levels. Researchers have also producedevidence that Dacogen treatment may reverse drug resistance by restoring thesensitivity of tumors to treatment by drugs such as cisplatin.

*MyelodysplasticSyndrome*

Myelodysplastic syndrome (“MDS”) is a bone marrowdisorder characterized by the production of abnormally functioning, immatureblood cells. According to the American Cancer Society, there are an estimated10,000-20,000 new cases of MDS in the United States each year. In themajority of afflicted patients, MDS results in death from bleeding andinfection. In other patients, MDS can transform to acute myelogenous leukemia (“AML”)a disease with a high mortality rate.

Dacogen received orphan drug designation in the UnitedStates and Europe, which should provide seven years of marketing exclusivity inthe United States from the May 2, 2006 approval date, and ten yearsmarketing exclusivity in Europe from the date of approval in the EU, if Dacogenis approved by the European regulatory authorities for MDS.

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We submitted a marketing application for Dacogen tothe European regulatory authorities that was accepted for review on October 25,2004. We, along with MGI, determined that additional clinical data will berequired to continue the review of Dacogen in Europe. Therefore, we withdrewthe application for Dacogen in November 2005.

During September 2004, we executed a definitiveagreement granting MGI exclusive worldwide rights to the development,manufacture, commercialization and distribution of Dacogen. Under the terms ofthe agreement, MGI made a $40.0 million equity investment in us and will pay upto $45.0 million in specific regulatory and commercialization milestones. Todate, we have received $32.5 million of these milestones. The Dacogen licensehas created a royalty income stream on worldwide net sales starting at 20% andescalating to a maximum of 30%.

In July 2006, MGIexecuted an agreement to sublicense Dacogen to Cilag GmbH, a Johnson &Johnson company, granting exclusive development and commercialization rights inall territories outside North America. In accordance with our license agreementwith MGI, we are entitled to receive 50% of any payments MGI receives as aresult of any sublicenses. We received $5.0 million, 50% of the $10 millionupfront payment MGI received, and, as a result of both the original agreementwith MGI and this sublicense with Cilag GmbH, may receive up to $23.75 millionin future milestone payments as they are achieved for Dacogen globally.Janssen-Cilag companies will be responsible for conducting regulatory andcommercial activities related to Dacogen in all territories outside NorthAmerica, while MGI retains all commercialization rights and responsibility forall activities in the United States, Canada and Mexico.

***Orathecin***

Orathecin is an oral chemotherapy compound in thecamptothecin class, licensed from the Stehlin Foundation for Cancer Research (“Stehlin”)in 1997. Orathecin is a second-generation topoisomerase I inhibitorthat causes single-strand breaks in the DNA of rapidly dividing tumorcells. Based on our developmental program and clinical trial results, webelieve that Orathecin may have significant advantages over many existinganti-cancer drugs, including efficacy, side effect profile and oral dosing.Orathecin has been tested in 46 clinical trials in 17 tumor types and 7hematologic malignancies in over 2,800 patients. Orathecin received orphan drugdesignation for pancreatic cancer in both the United States and Europe. Similarmarketing exclusivity is available in Japan.

An additional Phase IIclinical trial of Orathecin in combination with gemcitabine in first-linepatients with advanced pancreatic cancer was completed and interim resultsreported. The results of the trial were not robust enough to advance thisprotocol to a Phase III study. We are currently exploring alternativedevelopment opportunities for Orathecin.

***Nipent***

Nipent inhibits a keyenzyme in the DNA synthesis process and results in cytotoxicity, primarily inlymphocytes, with little other known effect on normal tissue. Nipent has beensold in the United States for the treatment of hairy cell leukemia, a type ofB-lymphocytic leukemia. We acquired Nipent from the Parke-Davis divisionof the Warner-Lambert Company (Pfizer) in 1996 and the remaining Europeanrights in February 2004. We believe that Nipent’s most unique feature isits selectivity for lymphocytes, which has created an interest in this productfor the treatment of cancers of the lymphoid system and other hematologicmalignancies. Nipent has been our principal source of revenue since 2000. Wesold Nipent rights in North America to Mayne Pharma in August 2006. Wesigned a definitive agreement to sell the remaining worldwide rights to Nipentto Mayne in November 2006. This transaction is scheduled to close in early2007.

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***Other Products and Product Candidates***

Thefollowing products, technology and developmental opportunities have beenidentified and valued as not critical to the future success of the company. Weare working to further define and realize the value of each. We have thefollowing products and product candidates:

| **Product Category** | ** ** | ** **                 | ** ** | **Compound**                                   | ** ** | ** ** | ** ** | **Indication or  Intended Use** | ** ** | **Therapeutic  Category** | ** ** | **Regulatory  Status** |
|----------------------|------------|----------------------------|------------|------------------------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------|------------|------------------------|
| Generic Anti-Cancer  |       | Mitomycin                  |       | Solid tumors                                   |       | Cancer     |       | Approved                        |
| Products             |       | Paclitaxel                 |       | Solid tumors                                   |       | Cancer     |       | Approved                        |
| Formulation Products |       | MitozytrexTM           |       | Solid tumors                                   |       | Cancer     |       | Approved                        |
|                 |       | Partaject busulfan         |       | Neoplastic meningitis/  bone marrow transplant |       | Cancer     |       | Phase I/II                      |
|                 |       | Partaject Orathecin        |       | Solid tumors                                   |       | Cancer     |       | Pre-clinical                    |
|                 |       | CZ 112                     |       | Solid tumors                                   |       | Cancer     |       | Phase I                         |
|                 |       | Cremophor-free  paclitaxel |       | Solid tumors                                   |       | Cancer     |       | Pre-clinical                    |
| Product Candidates   |       | Avicine                    |       | Therapeutic  Vaccine                           |       | Cancer     |       | Phase II                        |
|                 |       | VEGF                       |       | Anti-angiogenesis                              |       | Cancer     |       | Pre-clinical                    |

 

*Generic Anti-CancerProducts*

We have developed generic versions of existing anti-canceragents as part of our proprietary formulation product development efforts. Webelieve that the total estimated United States sales for generic anti-cancerproducts have decreased over the last few years due to increased competition.We also believe sales for these generics may continue to decrease as a resultof competitive factors. These factors may include reductions in the per unitsales price, introduction of additional generics as well as other cancer drugs,new formulations for these drugs and the use of different therapies. Therefore,we currently intend to limit our development of generic products to those thateither require minimal effort to submit an abbreviated new drug application (“ANDA”)and obtain marketing clearance, or that offer significant market opportunities.

*Mitomycin.**  *We received approval of an ANDA for our genericmitomycin in 1998 for the treatment of disseminated adenocarcinoma of thestomach or pancreas in proven combinations with other approved chemotherapeuticagents and as palliative treatment when other modalities have failed. We hadbeen selling mitomycin in the United States until 2006, and we also acted as acontract supplier for another distributor in the United States. Due to our saleof Nipent, which represented 88% of our net product revenues in 2006, to Mayneand the corresponding elimination of our commercial organization, we are nolonger selling mitomycin.

*Paclitaxel.**  *We filed an ANDA for generic paclitaxel with the FDAin August 1998. During November 2004, we received approval from theFDA of our ANDA Paclitaxel Injection, 6 mg/mL, packaged in 30 mg/5 mL and 100mg/16.7 mL multiple-dose vials. Paclitaxel belongs to the group of medicinescalled antineoplastics. The drug is equivalent to Bristol-Myers Squibb’s Taxol®Injection; an anti-tumor agent that has become one of the most widely usedanti-cancer products. Paclitaxel Injection’s approved indication is identicalto Taxol and is indicated as treatment for a variety of cancers. At this timewe will not directly market this product, but are in discussions with UnitedStates distributors to license out the ANDA.

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*FormulationProducts*

We have focused the application of our technologies onthe development of improved formulations of existing anti-cancer agents,which will be marketed as brand-name pharmaceuticals. We believe thatincorporating our technologies with these compounds may result in products withimproved delivery and/or administration. The development of these products issubject to the NDA approval process.

*Mitozytrex.**  *Our first product utilizing our formulationtechnology, Mitozytrex (mitomycin for injection), which is a formulation ofgeneric mitomycin, was approved by the FDA in November 2002 for use in thetherapy of disseminated adenocarcinoma of the stomach or pancreas in provencombinations with other approved chemotherapeutic agents and as palliativetreatment when other modalities have failed. We cannot promote Mitozytrex asproviding any injection site ulceration protection, nor can we promote anycommercially viable increased stability, solubility or shelf life extension, ascompared to generic mitomycin. We must develop and submit additional data tothe FDA in NDA supplements and receive FDA approval for additional claims. Weare currently exploring marketing opportunities and/or marketing partners forMitozytrex.

*PartajectDrug Delivery Technology.**  *Partajectdrug delivery technology is a drug delivery system that accommodates poorlywater-soluble and water-insoluble compounds by encapsulating themwith a fatty layer, known as a phospholipid. The Partaject technology involvescoating particles of a drug that are of submicron or near micron size with amembrane-forming phospholipid layer, thereby permitting the creation of asuspension of the drug rather than a solution, and its intravenous injectionwithout the use of potentially toxic solubilizing agents. As a result, webelieve the Partaject technology may reduce toxicity created by otherinjectable forms of delivery mechanisms and potentially increase efficacy byfacilitating delivery of compounds whose prior intravenous delivery wasimpractical because of solubility-related formulation difficulties.

*Partajectproducts under development.**  *Busulfanis currently marketed in an oral dosage form by GlaxoSmithKline for thepalliative treatment of chronic myelogenous leukemia. It is used “off-label” asa bone marrow ablating agent prior to bone marrow transplants. In 1998, wecompleted a Phase I clinical trial of Partaject busulfan at both Johns HopkinsOncology Center and Duke University Medical Center. A Phase I clinical trial inpediatric bone marrow ablation has been completed in 35 patients at St. Jude’sChildren’s Hospital in Memphis.

*OralProdrug Delivery Technology—CZ 112.**  *Oral prodrug delivery technology involvesadministering an inactive compound, known as a prodrug, which is absorbed inthe digestive tract and is converted enzymatically to an active agent in theliver. Oral prodrug delivery technology could potentially enable the oraldelivery of drugs that are otherwise only used in an intravenous formulation. Theresulting active compounds may pass through the systemic circulation and act atperipheral sites. We are applying the oral prodrug delivery technology to compoundsselected for their potential either to serve as oral delivery agents forsystemically active chemotherapeutic or radio sensitizing drugs previouslyavailable only in intravenous form. CZ 112 is an oral prodrug for Orathecin welicensed from Stehlin in November 1999 after initial Phase I testing.

*Cremophor-Free Paclitaxel.**  *In January and October 2000, we were issuedtwo United States patents for a cremophor-free formulation of paclitaxel. Wewere issued a third patent for an oral formulation in November 2001. Webelieve that these patents have important clinical and strategic implicationsas such a formulation obviates the need for pre-medication, which is currentlyrequired with the use of paclitaxel. We believe that the lack of pre-medicationand an oral formulation will prove to be major competitive advantages in thepaclitaxel market.

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*Product Candidates*

*Avicine.**  *In July 2000, we acquired the sales andmarketing rights in the United States to Avicine from AVI BioPharma, Inc.(“AVI”). Avicine is a therapeutic cancer vaccine and has completedPhase II clinical trials for colorectal and pancreatic cancer.

*VEGF (Anti-Angiogenesis).**  *In February 2001, we licensed from PeregrinePharmaceuticals (formerly known as Techniclone Corp.) a platform drug-targetingtechnology known as Vascular Targeting Agent (“VTA”). The licensed technologyis related to Vascular Endothelial Growth Factor (“VEGF”). The VTA technologyis a proprietary platform designed to specifically target a tumor’s bloodsupply and subsequently destroy the tumor with various attached therapeuticagents. We sublicensed this technology to Targa Therapeutics Corp. (“Targa”) in2006.

**ProprietaryFormulation Technology**

We have developed severalapplications for our proprietary formulation technology, a platform technologythat employs the use of an inert chemical excipient, cyclodextrin, combinedwith a drug. Most anti-cancer drugs are cytotoxic, and most must beadministered intravenously. If a vein is missed on injection, the drug can leakto surrounding tissue, causing ulceration that sometimes requires plasticsurgery to correct. Our proprietary formulation technology is designed to “shield”the drug from the injection site, thus helping to provide the patientprotection from tissue ulceration. It may also increase the relative solubilityof hard-to-dissolve anti-cancer drugs, hence potentially increasing itsstability or shelf life. Each of these benefits must be supported byappropriate data and approved by the FDA as part of an NDA filing. We believethat such features, if approved by the FDA, will result in our formulationproducts having a significant competitive advantage over their counterpartscurrently on the market. In March 1994, we acquired exclusive worldwiderights to the patented cyclodextrin technology used in our formulationtechnology from Janssen Biotech, N.V. and others.

**Non-OncologyProprietary Products**

We are currently seeking strategic alliances andlicensing agreements for further development of certain non-oncology products,including pyrazinoylguanidine (“PZG”) and AM 454.

PZG is a product for treatment of Type II, or adult-onset,diabetes. Animal studies and early clinical studies of PZG suggest that it mayhelp to control the blood sugar and lipid abnormalities of diabetes, and mayhave utility in treating a lipid disorder unrelated to diabetes calledhypertriglyceridemia, obesity, hypertension and the uremia of renal failure. Weinitiated a small, well-defined and controlled Phase II study to characterizethe hypoglycemic and lipid-lowering effects of PZG in Type II diabetes.

AM 454 is a DHEAphosphocholine derivative which may have utility in obesity and diabetes.

**Acquisition of NewProducts and Technologies**

We are continually reviewing new product developmentopportunities in an effort to enhance and create a broader product pipeline forfuture development.

OnApril 4, 2006, we completed our acquisition of Montigen, aprivately held, oncology-focused drug discovery and development companyheadquartered in Salt Lake City, Utah. Montigen’s assets included its researchand development team, a proprietary drug discovery technology platform and optimizationprocess, CLIMB, and late-stage pre-clinical compounds targeting Aurora-A Kinaseand members of the Tyrosine Kinase receptor family. Pursuant to the terms ofthe agreement, we paid the Montigen stockholders a total of $17.9 million uponthe closing of the transaction, consisting of $9.0 million in cash and $8.9million in shares of SuperGen common stock. We will pay the Montigenstockholders an additional $22.0 million in shares of SuperGen common stock,contingent upon achievement of specific 

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regulatorymilestones. The acquisition of Montigen has strengthened our pre-clinicaldevelopment efforts while we continue to focus on later-stage opportunities aswell.

**Research andDevelopment**

Because of the stage ofour development and the nature of our business, we expend significant resourceson research and development activities. We expended $16.5 million in 2006,$15.1 million in 2005, and $24.0 million in 2004 on research and development. Weconduct research internally and also through collaborations with third parties,and we intend to maintain our strong commitment to our research and developmentefforts in the future. Our major research and development projects haveincluded Dacogen, Orathecin, and studies on additional uses for Nipent.

*Dacogen*

From 1999 through 2006, we spent approximately $12.8million on the pre-clinical and clinical development of Dacogen. Dacogen wasapproved by the FDA in May 2006 as an anticancer therapeutic for thetreatment of patients with MDS.

In September 2004, welicensed to MGI the exclusive worldwide rights to the development,commercialization and distribution of Dacogen for all indications. We pursuedregulatory approvals of Dacogen for the treatment of MDS in the United Statesand Europe, with assistance from MGI, and by contract all development ofDacogen was transitioned to MGI by the end of 2005. MGI assumed fulldevelopment responsibilities following the transition to them. MGI is requiredto fund further development costs associated with Dacogen on their own at aminimum of $15 million over a three-year period.

*Orathecin*

From 1998 through 2006 we have spent approximately$72.5 million on the Orathecin program. In January 2004 we submittedan NDA under accelerated approval procedures to the FDA for Orathecin for thetreatment of pancreatic cancer patients, who have failed one or more therapies.Based on further discussions and feedback with both the FDA and consultants, wedetermined the current package for Orathecin was not sufficient to gainapproval at this time in the United States and we withdrew the NDA in January 2005.In July 2004, we submitted a marketing authorization to the Europeanregulatory authorities seeking approval of Orathecin. Based on extensivediscussions with the European regulatory authorities, we withdrew theapplication in January 2006. An additional Phase II clinical trial ofOrathecin in combination with gemcitabine in first-line patients with advancedpancreatic cancer was completed and interim results were reported. The resultsof the trial were not robust enough to advance this protocol to a Phase IIIstudy.

We are currently exploringplacing Orathecin and a few additional products into a new company that wouldraise independent capital to explore alternative development options.

*Nipent*

Through December 31,2005, we spent approximately $18.2 million on Phase I, II, and Phase IVprograms related to different potential indications for Nipent. We believe thatNipent has a unique mechanism of action and Phase IV trials indicate that itmay have activity in a variety of other hematologic cancers. We conducted PhaseIV studies for treatment of hematological malignancies and disorders.  All clinical studies relating to Nipent weretransitioned to Mayne in 2006.

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**Sales and Marketing**

We currently have noemployees in the U.S. focused on sales, marketing, and sales support. Ourmarketing efforts are now within the Corporate Communications and BusinessDevelopment group. At our European subsidiary, EuroGen Pharmaceuticals, we havetwo employees focused on the sale and distribution of Nipent throughout Europe.

**Manufacturing**

We currently outsourcemanufacturing for all of our products to United States and foreign suppliers.We expect to continue to outsource manufacturing in the near term. We believeour current suppliers will be able to efficiently manufacture our proprietaryand generic compounds in sufficient quantities and on a timely basis, whilemaintaining product quality and compliance with FDA and foreign regulations. Wemaintain oversight of the quality control function of our third-partymanufacturers through ongoing inspections, rigorous review, control overdocumented operating procedures, and thorough analytical testing by outsidelaboratories. We believe that our current strategy of outsourcing manufacturingis cost-effective because we avoid the high fixed costs of plant, equipment,and large manufacturing staffs.

The FDA must issuemarketing clearance and deem a manufacturer acceptable under current goodmanufacturing practices (“GMPs”) before production of active pharmaceuticalingredients, finished pharmaceuticals, or proprietary and generic drugs forcommercial sale may begin. Once a proprietary or generic compound ismanufactured on our behalf, it is sent to one or more domestic manufacturersthat process it into the finished dosage forms.

We intend to continueevaluating our manufacturing requirements and may establish or acquire our ownfacilities to manufacture our products for commercial distribution if doing sowould reduce costs or improve control and flexibility of product supply.

**Business Relationships and Material Contracts**

***Strategic,Collaborative and Licensing Relationships and Related Agreements***

Ourstrategy had been to identify and license or buy rights to products orcompounds that were typically in human clinical development. We then sought toenhance and complete the product development to bring the products to marketinternally or through collaborations. We have entered into a variety ofstrategic and collaborative relationships and licensing agreements in pursuingour business. Some of our more significant relationships are as follows:

1.     *Dacogen—Pharmachemie and MGI PHARMA, Inc.*

In September 1999, weentered into a Know-How Transfer and Cooperation Agreement with Pharmachemie.Under the agreement, Pharmachemie sold and transferred to us its know-howrelated to a pharmaceutical product approach for the treatment of leukemia andother hematologic malignancies, called the “Decitabine Project.”  Under the agreement, we obtained all rightsand title with respect to the know-how related to the Decitabine Project,including the related intellectual property rights, and the exclusiveworld-wide right to use the know-how for any purpose whatsoever, including thefiling of applications for marketing approval of the products. Upon executionof the agreement, we delivered to Pharmachemie shares of our common stock equalto $3.4 million. Decitabine was subsequently trademarked as Dacogen.

In August 2004, weentered into a license agreement with MGI relating to Dacogen (the “LicenseAgreement”), which became effective on September 21, 2004. Pursuant to theterms of the License Agreement, MGI received exclusive worldwide rights to thedevelopment, commercial­ization and distribution of Dacogen for all indications.We continued to pursue with MGI regulatory approvals of Dacogen for thetreatment of MDS in the United States and Europe and, in accordance with theLicense 

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Agreement,all development of Dacogen was transitioned to MGI by the end of 2005. MGIassumed full development responsibilities following the transition to them. MGIis required to fund further development costs associated with Dacogen at aminimum of $15 million over a three year period. In addition to MDS, MGI willpursue development of Dacogen for other indications. If specified regulatoryand commercialization milestones are achieved, MGI will pay us up to $45million based upon the achievement of such milestones. Subject to certainlimitations, MGI will also pay us 50% of certain revenue payable to MGI as aresult of MGI sublicensing rights to market, sell, and/or distribute Dacogen,to the extent such revenues are in excess of the milestone payments. We willreceive a royalty starting at 20% and escalating to a maximum of 30% on annualworldwide net sales of licensed products.

Under the terms of the License Agreement, MGI isobligated to pay us milestone payments for achievement of certain regulatoryand commercialization goals, as well as reimburse us for certain development andallocated overhead costs of Dacogen until we receive marketing authorization. Duringthe years ended December 31, 2006, 2005 and 2004, we recorded developmentrevenue of $93,000, $3.4 million and $3.6 million, respectively, relating tothe reimbursements under this agreement. During the year ended December 31,2004, we recognized development revenue of $12.5 million for milestoneachievement. In May 2006,the FDA approved Dacogen for the treatment of patients with MDS and MGIcommenced commercial sales of Dacogen in the United States. In accordance withour license agreement with MGI, we received a milestone payment of $20.0million in the second quarter of 2006. During the year ended December 31,2006, we also recorded royalty revenue of $3.4 million, based on 20% of MGI’ssales of Dacogen.

In July 2006,MGI executed an agreement to sublicense Dacogen to Cilag GmbH, a Johnson &Johnson company, granting exclusive development and commercialization rights inall territories outside North America. In accordance with our license agreementwith MGI, we are entitled to receive 50% of any payments MGI receives as aresult of any sublicenses. We received $5.0 million, 50% of the $10 millionupfront payment MGI received, and, as a result of both the original agreementwith MGI and this sublicense with Cilag GmbH, may receive up to $23.75 millionin future milestone payments as they are achieved for Dacogen sales globally. Janssen-Cilagcompanies will be responsible for conducting regulatory and commercialactivities related to Dacogen in all territories outside North America, whileMGI retains all commercialization rights and responsibility for all activitiesin the United States, Canada and Mexico.

2.     *Orathecin—The Stehlin Foundation for Cancer Research*

In September 1997, we entered into a LicenseAgreement, as subsequently amended in 1999, to license the exclusive worldwideroyalty-bearing rights to Orathecin from Stehlin, a Houston, Texas basedcancer research clinic. Under the agreement, we have the right to grantsublicenses, make, import, use, sell, offer for sale and otherwise distributeand exploit the licensed products worldwide. We must use commerciallyreasonable efforts to develop the licensed Orathecin products and obtainregulatory approval for the products.

We may, at our sole discretion, enter into agreementswith third parties with respect to the development of the licensed products. Wemust bear our own costs incurred in connection with the development of theproducts, and, except for the payments described in the agreement, Stehlin willbear its own costs incurred in connection with the performance of the researchactivities that we may request and Stehlin agrees to undertake in connectionwith the development of the licensed products. The development responsibilitiesunder the agreement are coordinated by a committee consisting of an equalnumber of employees of each party, provided that we have the deciding vote inthe event of any disagreement.

Stehlin continues to hold the title to all inventionsand other intellectual property made solely by employees or consultants ofStehlin with respect to Orathecin, and we hold the title to all inventions andother intellectual property made solely by our employees or consultants inconnection with activities under 

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the agreement. Title toall inventions and other intellectual property made jointly by employees orconsultants of the parties in connection with the agreement are jointly ownedby the parties. In the event Stehlin elects to license any product (other thanthe Orathecin products) for human medicinal purposes for any uses that includepancreatic cancer or antineoplastic use, we have the right of first refusal toobtain from  Stehlin a license underpatents owned or controlled by Stehlin to market such products.

We have paid Stehlin approximately $9.6 millionthrough December 31, 2006 for research under this agreement. Our agreementwith Stehlin also calls for additional payments in our common stock upon theachievement of specified milestones and royalties on any product sales. We mustmake milestone payments under the agreement upon (a) notification by theFDA of the acceptance for filing of the first NDA submitted for Orathecin and (b) ourreceipt of the FDA notice that it has approved Orathecin for marketing. Each ofsuch payments will be made in restricted shares of our common stock at a pershare purchase price equal to the average trading price of the shares over a 30-daytrading period. During the year ended December 31, 2004, the FDA acceptedfor filing our NDA submission for Orathecin. This triggered a requiredmilestone payment to Stehlin of $500,000. We made the milestone payment throughthe issuance of 63,969 shares of unregistered common stock, which wascalculated based on the average trading price of our stock during the 30-dayperiod preceding the payment date.

Unless terminatedsooner as provided in the agreement, the agreement will continue in full forceand effect on a country-by-country and licensed product-by-licensed productbasis until there are no remaining royalty payment obligations in a country, atwhich time the agreement will terminate in its entirety in such country. Wewill continue to have a perpetual, non-exclusive, royalty-free license, withthe right to grant sublicenses, to make, import, use, sell, offer for sale andotherwise distribute and exploit the Orathecin products for human medicinalpurposes in such country. We may terminate the agreement with respect to anycountry with 60 days written notice to Stehlin. In addition, if eitherparty materially breaches the agreement, the other party will have certaintermination rights. Further, either party may terminate the agreement if theother becomes the subject of a voluntary or involuntary petition in bankruptcyor any proceeding relating to insolvency, receivership or liquidation for thebenefit of creditors, if that petition or proceeding is not dismissed withprejudice within 60 days after filing.

3.     *Nipent—Warner-Lambert Company (Pfizer)*

In September 1996, we entered into a Purchase andSale Agreement with the Warner-Lambert Company (Pfizer), pursuant towhich we obtained the exclusive rights to the anti-cancer drug Nipentfrom Warner-Lambert for the United States, Canada and Mexico. The assetswe acquired included all of Warner-Lambert’s unpurified crude concentrateform of pentostatin, from which Nipent is made, and related inventory, NDA forthe United States, Canadian new drug submission and certain intellectualproperty.

In addition, to the extent not acquired by us underthe agreement, Warner-Lambert granted us an irrevocable, non-exclusive,worldwide, perpetual and royalty-free license to use all the technical know-howreasonably required or useful for the manufacture of the pentostatin productsunder the agreement, and any other intellectual property owned or licensed byWarner-Lambert as of the closing date necessary or helpful in themanufacture of the pentostatin products.

In consideration for the assets and relatedintellectual property rights acquired by us under the agreement, we paid Warner-Lambert$2.1 million in cash and $1.0 million in unregistered shares of ourcommon stock, followed by an additional cash payment of $500,000.

In February 2004, we entered into a Purchase andSale Agreement with Pfizer Inc. pursuant to which we acquired the right tomarket Nipent in Europe and associated regulatory approvals and related assets. We paid Pfizer $1.0 million under thisagreement.

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4.     *VTA/VEGF—Peregrine Pharmaceuticals*

In February 2001, we entered into a License Agreementto license a platform drug-targeting technology known as Vascular TargetingAgent from Peregrine Pharmaceuticals. The licensed technology is related toVEGF. The VTA technology is a proprietary platform designed to specificallytarget a tumor’s blood supply and subsequently destroy the tumor with variousattached therapeutic agents.

Under the agreement, we obtained an exclusive,worldwide, royalty-bearing license to Peregrine’s patents related to theVTA technology, which permits us to make, use, import, sell and otherwiseexploit and distribute licensed products using the VTA technology. We may alsogrant sublicenses under the VTA technology pursuant to the agreement.

The agreement required an up-front payment of$600,000, which included the acquisition of 150,000 shares of Peregrine commonstock valued at $253,000. The remaining $347,000 of the payment was recorded asresearch and development expense. We are also required to pay Peregrine anannual license fee of $200,000 per year in cash or our common stock until thefirst filing of an IND in the United States utilizing the licensed patents. Inaddition, the terms of the agreement require that we pay milestone payments androyalties to Peregrine based on the net revenues of any drugs commercialized usingthe VTA technology. The milestone payments could ultimately total approximately$8.25 million, plus additional royalty payments as required under theagreement. We are required to make milestone payments to Peregrine upon (a) commencementby us of the first Phase III trial in the United States, Europe or Japan forthe first therapeutic clinical candidate covered under the licensed patents; (b) commencementby us of Phase III trial in the United States, Europe or Japan for subsequenttherapeutic clinical candidates covered under the licensed patents; (c) commencementby us of a Phase II/III trial, if any; (d) receipt of regulatory approvalin the United States for the first therapeutic clinical candidate covered underthe licensed patents; (e) receipt of regulatory approval in a Europeannation for the first therapeutic clinical candidate covered under the licensedpatents; and (f) receipt of regulatory approval in Japan for the firsttherapeutic clinical candidate covered under the licensed patents.

The agreement will continue in full force and effecton a country-by-country and product-by- product basis until there are noremaining royalty payment obligations in a country, at which time the agreementwill expire in its entirety in such country, unless terminated sooner asprovided in the agreement. Upon expiration of the agreement in any country, wewill have a non-exclusive, irrevocable, fully paid-up right and license to useand exploit the licensed patents in that country. We may terminate the agreementwith respect to any country with 30 days written notice to Peregrine. Inaddition, if either party materially breaches the agreement, the other partywill have certain rights to terminate the agreement.

In August 2006,we sublicensed the VEGF technology to Targa. In connection with thissublicense, Targa has agreed to develop and commercialize the VEGF technologyand will pay us an annual payment equal to the annual license fee due toPeregrine under our original license agreement. In addition, upon the achievementof milestones under the original license agreement, Targa has agreed to pay usan amount equal to such milestone payments. Targa has also agreed to reimburseus for royalties due to Peregrine on licensed product sales, provided thatPeregrine reduced the royalty rates in writing. In February 2007, weamended our license agreement with Peregrine to reduce these royalty rates.

5.     *Avicine—AVI  BioPharma, Inc.*

In December 1999, we entered into an agreementwith AVI to acquire one million shares of AVI common stock, which amounted toapproximately 7.5 percent of AVI’s then outstanding common stock, for$2.5 million cash and 100,000 shares of our common stock at $28.25 pershare. The chief executive officer of AVI at the time was a member of our boardof directors (who later resigned from our board in May 2002), and a formermember of our board of directors was a member of the board of directors of AVIthrough March 2004. We also acquired exclusive negotiating rights for theUnited States market for 

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Avicine, AVI’s proprietarycancer vaccine currently in late-stage clinical testing against a variety ofsolid tumors. Avicine is an immunotherapy that neutralizes the effect of atumor-associated antigen on cancer cells, while stimulating the body’simmune system to react against the foreign tumor.

In April 2000, we entered into a United Statessales, distribution and development agreement with AVI to become the exclusivedistributor and promoter in the United States of any pharmaceutical productcontaining Avicine.

Under the terms of the agreement, we are responsiblefor advertising, marketing, selling and promoting Avicine in the United States,and AVI is responsible for product manufacturing, packaging, sterilization andlabeling. AVI has granted us an exclusive license to sell the Avicine productsin the United States. In the event that AVI or its third-partymanufacturers are unable to fill product orders for a total of 60 days,then we will have a non-exclusive license to manufacture Avicine products. IfAVI is unable to meet its obligations under the agreement for six months, AVImust notify us and the parties will consider steps to preserve our rights toAvicine, including, but not limited to, the grant of a non-exclusive, royaltybearing license to us to develop and sell Avicine products in the UnitedStates. Under the agreement, we also obtained the right of first discussionwith respect to all of AVI’s oncology compounds.

We formed a joint Clinical Development Committee withAVI to oversee, review and coordinate the implementation of the clinicalstudies and the pursuit of regulatory approvals in the United States, and wewill equally share the costs for the FDA approval process. In addition, any netprofits from the sale of Avicine products in the United States will be splitequally among the parties. Further, the parties will jointly determine theoptimum development strategy for the international marketplace.

AVI will maintain any patents owned by it or licensedto AVI relating to Avicine as identified and agreed to by the parties, and AVIwill use its reasonable commercial efforts to prosecute any agreed upon patentapplications. In addition, the parties will consult together and jointlydetermine patent issues, including patenting strategy, prosecution and responseto patent office actions. AVI will be solely responsible for the selection,filing, registration and maintenance of any AVI trademarks related to Avicinein the United States. We have a non-exclusive limited license to use AVI’s nameand logo in the United States, and a co-exclusive limited license to use AVItrademarks related to Avicine in the United States, in each instance solely forthe purpose of promoting, distributing and selling Avicine products in theUnited States in accordance with the terms and conditions of the agreement.

In consideration of past research and developmentperformed by AVI, we made an additional equity investment in AVI totaling$22.0 million in exchange for 1,684,211 shares of AVI common stock, paid ina combination of $5.0 million cash and the issuance of 347,826 shares ofour common stock. As part of the agreement, we have a warrant to acquire up to 1,665,478shares of AVI’s common stock, subject to anti-dilution provisions, at an aggregateexercise price equal to $60.0 million, or $35.625 per share. This warrantis exercisable for a three-year period commencing on the earlier of the datethe FDA accepts the NDA submitted for Avicine, or the date on which the closingprice of AVI’s common stock exceeds the warrant exercise price. Neither eventhad occurred as of December 31, 2006.

We will be required to make additional milestonepayments to AVI for an aggregate of up to $80.0 million, including(a) $2.5 million in our stock or cash, upon completion of accrualinto the Phase III trial for Avicine; (b) $2.5 million in our stockor cash, upon acceptance by the FDA of the NDA submitted for Avicine;(c) $5.0 million in our stock or cash, upon launch of Avicine in theUnited States, (d) $10.0 million in cash, when our annual Avicineproduct sales reach $100.0 million; (e) $15.0 million in cash,when our annual Avicine product sales reach $250.0 million;(f) $20.0 million in cash, when our annual Avicine product salesreach $500.0 million; and (g) $25.0 million in cash, when ourannual Avicine product sales reach $1.0 billion. The ability to makemilestone payments in our stock shall be at our option, subject to ownershiplimitations.

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Unless terminated sooner as provided in the agreement,the agreement will expire upon the earlier of (a) the date upon which ageneric version of Avicine is first sold in the United States by someone otherthan us or (b) the date which is 15 years after the date ofregulatory approval of Avicine in the United States, provided that we and AVImay renew the agreement for the United States for (1) further successiveone year periods, or (2) further successive periods of time during whichany applicable marketing exclusivity precludes the effective approval by theFDA of any product containing Avicine. In addition, either party may terminatethe agreement if the ownership or control of at least 50% of the assets orvoting securities of the other party are transferred and, in the non-changingparty’s reasonable judgment, the other party’s new owner or controlling entityis a competitor of the non-changing party in the field of oncology.

6.     *MP-470—University of Arizona*

As part of the Montigen acquisition, we acquired thelicense agreement with the University of Arizona. This license grants us anexclusive, worldwide license, with right to sublicense, to make, have made,use, import, market, sell and distribute MP-470 for all diagnostic,prophylactic or therapeutic applications. The license agreement is effectiveuntil the expiration, revocation or invalidation of the last-to-expirepatent or the abandonment of the last patent application, whichever comeslater.

Under the licenseagreement, we are required to pay a non-refundable, non-cancelable licensemaintenance fee of $6,250 per year and non-refundable, non-cancelable,non-creditable milestone fees, ranging from $25,000 to $150,000, based onfiling of an IND, completion of Phase III clinical trials, and marketing approvalin the US and other major market countries. In addition, we will be required topay royalties of up to 1% of net sales, and 5% of any sublicense revenuesreceived up to a maximum of $250,000 per sublicense with payments not to exceed$1.5 million during the term of the agreement.

***Supply and Distribution Agreements***

We have entered into a variety of supply anddistribution agreements in pursuing our business. Some of our more significantrelationships are as follows:

1.     *Warner-Lambert Company (Pfizer)—Nipent*

In October 1997, we entered into a SupplyAgreement with Warner-Lambert Company (Pfizer), pursuant to which wecontracted to manufacture and supply the pharmaceutical preparation for humanuse containing pentostatin in unlabeled sterile filled vials to Warner-Lambertor any entity designated by Warner-Lambert to act on its behalf withrespect to the purchase of the product, for sale outside of North America(United States, Canada and Mexico) and Japan.

In February 2004,we entered into a Purchase and Sale Agreement with Pfizer Inc. to terminatethis Supply Agreement and to acquire European marketing rights for Nipent. We paid Pfizer $1.0 million under thisagreement.

2.     *Sigma-Aldrich Fine Chemicals (Tetrionics)—Nipent*

In September 2004, we entered into a Drug SubstanceValidation and Supply Agreement with Tetrionics, Inc., now Sigma-Aldrich FineChemicals (“SAFC”), pursuant to which SAFC will validate certain of our currentmanufacturing processes for Nipent and manufacture validation batches of Nipentusing pentostatin crude concentrate supplied by us or parties authorized by us.Under the agreement, we will own all deliverables and intellectual propertyrelated thereto and have access to SAFC facilities where it performs thedevelopment and manufacturing activities to ensure compliance with applicablestandards and other requirements. In addition, SAFC has granted us a licenseunder its proprietary technologies in the event it does not or is unable tosupply the Nipent it is obligated to do so and has agreed to assist us in 

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securing alternate supplyin such instance. SAFC will be responsible for obtaining all necessaryregulatory permits and other licenses in order to manufacture and supply Nipentto us under the agreement.

Under the agreement, we and SAFC agreed to enter intoa commercial manufacture and supply agreement pursuant to which SAFC wouldmanufacture and supply to us quantities of Nipent we order from time to timeusing pentostatin crude concentrate supplied by us or parties authorized by us.Subject to other conditions of the commercial manufacture and supply agreementwe will agree to purchase up to 50% of our commercial requirements for Nipent.The commercial manufacture and supply agreement will include other standard andcustomary terms and conditions which have been agreed to by us and SAFC and setforth in the Drug Substance Validation and Supply Agreement, including price,forecasting requirements, product warranties and delivery terms. The commercialmanufacture and supply agreement will initially be for a five year term andthereafter extendable by mutual agreement of SAFC and us.

The commercial manufactureand supply agreement with SAFC is being transitioned to Mayne Pharma in early2007 as part of their acquisition of Nipent.

**GovernmentRegulation: New Drug Development and Approval Process**

Regulation by governmental authorities in the UnitedStates and other countries is a significant factor in the manufacture andmarketing of pharmaceuticals and in our ongoing research and developmentactivities. All of our drug products will require regulatory approval bygovernmental agencies prior to commercialization. In particular, humantherapeutic products are subject to rigorous pre-clinical testing, clinicaltrials, and other pre-marketing approval requirements by the FDA and regulatoryauthorities in other countries. In the United States, various federal, and insome cases state statutes and regulations also govern or have an impact uponthe manufacturing, safety, labeling, storage, record-keeping andmarketing of such products. The lengthy process of seeking required approvalsand the continuing need for compliance with applicable statutes and regulationsrequire the expenditure of substantial resources. Regulatory approval, when andif obtained, may be limited in scope which may significantly limit theindicated uses for which a product may be marketed. Further, approved drugs, aswell as their manufacturers, are subject to ongoing review and inspectionswhich could reveal previously unknown problems with such products, which mayresult in restrictions on their manufacture, sale or use or in their withdrawalfrom the market.

The process for new drug approval has many steps,including:

*Drugdiscovery.**  *In theinitial stages of drug discovery, large numbers of potential compounds arescreened for activity. This drug discovery process can take several years. Oncea company defines a lead compound, the next steps are to conduct furtherpreliminary studies on the mechanism of action, *in vitro* (test tube) screening against particular diseasetargets and some *in vivo*(animal) screening. If the compound passes these hurdles, animal toxicologystudies are initiated. If the results demonstrate acceptable levels oftoxicity, the compound emerges from the basic research mode and moves into thepre-clinical phase.

*Pre-clinicaltesting.**  *Duringthe pre-clinical testing stage, laboratory and animal studies are conducted toshow biological activity of the compound against the disease target and thecompound is evaluated for safety. These tests can take several years tocomplete and must be conducted in compliance with Good Laboratory Practice (“GLP”)regulations, which are practices expected by the European, Japanese and UShealth authorities.

*Investigationalnew drug application.**  *Afterappropriate animal testing is evaluated and the candidate molecule is found tohave an acceptable safety profile, the Company may decide to expand thedevelopment programs to a clinical setting. To accomplish this in the U.S. anIND, sometimes called a “clinical trial application,” is submitted to the FDAto begin human testing of the drug. Health Authorities 

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in Europe require similarapplications to initiate human testing in countries governed by EU regulations.The IND submitted in the U.S. includes the known chemistry of the compound, howthe compound is manufactured, the results of animal studies and other previousexperiments, the method by which the drug is expected to work in the humanbody, a proposed clinical development plan and how, where and by whom theproposed new clinical studies will be conducted. All clinical trials must beconducted in accordance with good clinical practices (“GCPs”). This means thatthe Company has specific obligations to monitor the study, collect the data andreport it at least annually.

Independent of the Company, clinical protocols arereviewed by independent Institutional Review Boards (“IRB”) in the US andEthical Committees in Europe at the hospital or clinic where the proposedstudies will be conducted. The IRB is charged with providing an independentassessment of the appropriateness of the study, particularly focusing on thesafety of the subjects/patients that might enroll in the study. The IRB’sresponsibilities continue while the study is ongoing, focusing on protectingthe rights and safety of those enrolled in the study.

The Company has an obligation to provide progressreports on clinical trials at least annually to the FDA. The FDA may, at anytime during a clinical trial, impose a “clinical hold” if they have serioussafety concerns about a trial. If this occurs, the clinical trial cannotcontinue until the FDA is satisfied that it is appropriate to proceed.

Clinical trials are typically conducted in threesequential phases, but the phases may overlap.

*PhaseI clinical trials.**  *After anIND becomes effective, Phase I human clinical trials can begin. These trialsgenerally involve 20 to 80 healthy subjects or patients and typically takeapproximately one year to complete. These trials are designed to evaluate adrug’s safety profile and may include studies to assess the optimal safe dosagerange. Phase I clinical studies may evaluate how a drug is absorbed,distributed, metabolized and excreted from the body.

*PhaseII clinical trials.**  *In PhaseII clinical trials, studies are conducted in patients who have the targeteddisease. The primary purpose of these trials is to evaluate the safety of thedrug in the target patient population but often preliminary efficacy data isalso obtained. These studies typically take a few years to complete. Foranti-cancer drugs, the first human studies are referred to as Phase I/IIstudies because they evaluate safety and preliminary efficacy directly in thetarget patient population. This is done because most anti-cancer drugs are verytoxic and cannot be administered to healthy subjects, as is typical in Phase Istudies in other therapeutic areas such as cardiovascular, central nervoussystem and infectious diseases.

*PhaseIII clinical trials.**  *Thesetrials are typically large, involving several hundred or even thousands ofpatients. Phase III trials typically compare an investigational agent against acontrol product which could be a product already approved for use in thatdisease or a placebo. During these trials, physicians record observations as definedin the sponsor’s protocol onto Case Report forms. The data generated in thesestudies are monitored regularly by company clinical monitors as well as theparticipating physician. There are specific requirements for the physician toreport any adverse reactions that may result from the use of the drug. Companyclinical monitors visit the sites regularly and transmit the data back to thecompany for analysis and ultimately for presentation to the FDA.

*Marketingapplication.**  *Companieshave the opportunity to interact with health authorities in the US and EUduring the course of a drug development program. Most companies take advantageof this access to gain further insights about the kinds of data that will beexpected in their marketing application. After completion of the clinical trialphase, a company must compile all of the chemistry, manufacturing, pre-clinicaland clinical data into a marketing application. In the United States, this iscalled a New Drug Application; in the EU it is called a Marketing ApplicationAuthorization (“MAA”). This is a significant 

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amount of information,often in excess of 100,000 pages, and it will be independently reviewed bythese health authorities.

Both the FDA and the European Medicines Agency (“EMEA”)review these submissions for overall content and completeness before acceptingthem for review and may request additional information. Once an application isaccepted for filing, each agency independently begins its in-depth review. Inboth the United States and Europe, there are specified timeframes for thecompletion of review. This process may be extended if an agency requestsadditional information or clarification regarding the data provided in thesubmission.

In the United States, the FDA may refer theapplication to an appropriate advisory committee for a recommendation as towhether the application should be approved, but the FDA is not bound by thisrecommendation. If FDA evaluations of the NDA and the manufacturing facilitiesare favorable, the FDA may issue either an approval letter or an approvableletter. The latter typically contains a number of conditions that must be metin order to secure final approval. When and if those conditions are met to theFDA’s satisfaction, the FDA will issue an approval letter, authorizingcommercialization of the drug for specific indications. If the FDA’s evaluationof the NDA submission or manufacturing facilities is not favorable, the FDA mayreject the application by issuing a non-approvable letter. The review andapproval process in Europe has substantial similarities to that outlined forthe United States.

*Marketingapproval.**  *When ahealth authority grants marketing approval to a drug, it can now be madeavailable for physicians in that country or region to prescribe for theirpatients. Periodic safety reports must be submitted to health authorities as away to monitor the use of new drugs introduced to the market. Regulatoryagencies around the world place great emphasis on pharmacovigilance, a termthat describes the need to monitor the safety of a drug when it is released forgeneral use, as this is a real world setting, which is very different from thecontrolled environment of clinical trials.

*PhaseIV clinical trials and post marketing studies.**  *In addition to studies that might have been requestedby health authorities as a condition of approval, clinical trials may beconducted to generate more information about the drug after marketing approval,including the use of new dosage forms or new dosing regimens. These studies maygenerate publications that provide further information to patients and themedical community.

*FastTrack.**  *The FDAModernization Act of 1997 specifies that the FDA can assign a fast trackdesignation to a new drug or biologic product that is intended for thetreatment of a serious or life-threatening condition and has the potential toaddress unmet medical needs for such a condition. Under this program, thesponsor may request this designation at any time during the development of theproduct. The FDA must determine whether the product qualifies within60 days of receipt of the sponsor’s request. For a product designated asfast track, the FDA has the ability to define a faster review, includingallowing the sponsor to provide the NDA in discrete sections. This process iscalled a “rolling” NDA and is intended to accelerate the review and approvalprocess.

SuperGen obtained fast track designations forOrathecin for the treatment of patients with locally advanced or metastatic pancreaticcancer and for Dacogen for the treatment of patients with MDS and intends toseek such designation for other products, where appropriate. We cannot predictthe ultimate impact, if any, of the fast track process on the timing orlikelihood of FDA approval of any of our future products.

*Approvalsin the European Union.**  *In1993, the EU established a system for the registration of medicinal products inthe EU whereby marketing authorization may be submitted at either a centralizedor decentralized level. The centralized procedure is administered by the EMEAand is mandatory for the approval of biotechnology products and is available,at the applicant’s option, for other innovative products. The centralizedprocedure provides for the granting of a single marketing authorization that is

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valid in all EU memberstates. A mutual recognition procedure is available at the request of theapplicant for all medicinal products that are not subject to the mandatorycentralized procedure, under a decentralized procedure.

*Approvalsoutside of the United States and EU.**  *Applications to market a new drug product must bemade to virtually all countries prior to marketing. The approval procedure andthe time required for approval vary from country to country and may involveadditional testing and cost. There can be no assurance that approvals will begranted on a timely basis or at all. In addition, pricing approval is requiredin many countries and there can be no assurance that the resulting prices wouldbe sufficient to generate an acceptable return on investment.

*Off-Label Use.**  *Physicians may prescribe drugs for uses that are notapproved in the product’s labeling. Such “off-label” prescription may be usedby physicians across medical specialties. The FDA does not regulate thebehavior of physicians in their choice of treatments but it does limit amanufacturer’s communications on the subject of off-label use. Companies cannotactively promote FDA approved drugs for off-label uses.

*Generic drugdevelopment*

For certain drugsthat are generic versions of previously approved products, there is anabbreviated FDA approval process. A sponsor may submit an ANDA for:

·       adrug product that is the “same” as the drug product listed in the approved drugproduct list (“listed drug”) published by the FDA with respect to activeingredient(s), route of administration, dosage form, strength and conditions ofuse recommended in the labeling;

·       adrug product that differs with regard to certain changes from a listed drug ifthe FDA has approved a petition from a prospective applicant permitting the submissionof an ANDA for the changed product; and

·       adrug that is a duplicate of, or meets the monograph for, an approved antibioticdrug.

An ANDA needs to includemanufacturing information but does not contain the clinical and pre-clinicaldata supporting the safety and effectiveness of the product. The applicant mustinstead demonstrate that the product is bioequivalent to the listed drug. FDAregulations define bioequivalence as the absence of a significant difference inthe rate and the extent to which the active ingredient moiety is absorbed whenadministered at the same molar dose under similar conditions in anappropriately designed study. If the approved generic drug is bothbioequivalent and pharmaceutically equivalent to the listed drug, the agencymay assign a code to the product in an FDA publication that will represent adetermination by the agency that the product is therapeutically equivalent tothe listed drug. This designation will be considered by third parties indetermining whether the generic drug will be utilized as an alternative to thelisted drug.

*Other GovernmentRegulations*

As a US-based company, inaddition to laws and regulations enforced by the FDA, we are also subject toregulation by other agencies under the Occupational Safety and Health Act, theEnvironmental Protection Act, the Toxic Substances Control Act, the ResourceConservation and Recovery Act and other present and potential future federal,state or local laws and regulations. These agencies have specialized responsibilitiesto monitor the controlled use of hazardous materials such as chemicals, virusesand various radioactive compounds.

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**Market Exclusivity**

The commercial success ofa product, once it is approved for marketing, will primarily depend on acompany’s ability to create and sustain market share and exclusivity. Marketexclusivity can be gained and maintained by a number of methods, including, butnot limited to: patents, trade secrets, know-how, trademarks, branding andspecial market exclusivity provisions.

***Orphan Drug Designation***

The United States, EU, Japan and Australia have allenacted regulations to encourage the development of drugs intended to treatrare diseases. Orphan drug designation must be requested before submitting anapplication for marketing approval. After the granting of an orphan drugdesignation, the chemical identity of the therapeutic agent and its potentialtreatment use are disclosed publicly. If and when a product with orphan drugstatus receives marketing approval for the orphan indication, the product isentitled to marketing exclusivity, which means the regulatory authority may notapprove any other applications to market the same drug for the same indicationfor seven years in the United States, ten years in Europe and Japan and fouryears in Australia.

Orathecin has receivedorphan drug designation from the FDA and the EMEA for treatment of patientswith refractory pancreatic cancer. Dacogen also received orphan drugdesignation from the FDA and EMEA for the treatment of patients with MDS andsickle cell anemia.

***Patents and Proprietary Technology***

Patents are very important to us in establishingproprietary rights to the products we develop or license. The patent positionsof pharmaceutical and biotechnology companies, including us, can be uncertainand involve complex legal, scientific, and factual questions. See “*Risk Factors—Our ability to protect our intellectual property rightswill be critically important to the success of our business, and we may not beable to protect these rights in the United States or abroad*.”

We actively pursue a policy of seeking patentprotection when applicable for our proprietary products and technologies,whether they are developed in-house or acquired from third parties. We attemptto protect our intellectual property position by filing United States andforeign patent applications related to our proprietary technology, inventionsand improvements that are important to the development of our business. Todate, we have filed approximately 24 United States and foreign patentapplications related to our novel CLIMB drug discovery program. We haveacquired licenses to or assignments of over 65 United States patents coveringvarious aspects of our proprietary drugs and technologies, including 41 patentsfor various aspects of Orathecin and related products, seven patents for ourpaclitaxel related products, six patents for various aspects of Dacogen andrelated products. We have been granted patents and have received patentlicenses relating to our proprietary formulation technology, non-oncologyand non-core technologies, among which at least 10 patents are issued orlicensed to us. In addition, we are prosecuting a number of patent applicationsfor drug candidates that we are not actively developing at this time.

There can be no assurance that the patents granted orlicensed to us will afford adequate legal protection against competitors orprovide significant proprietary protection or competitive advantage. Thepatents granted or licensed to us could be held invalid or unenforceable by acourt, or infringed or circumvented by others. In addition, third parties couldalso obtain patents that we would need to license or circumvent. Competitors orpotential competitors may have filed patent applications or received patents,and may obtain additional patents and proprietary rights relating to proteins,small molecules, compounds, or processes that are competitive with the productswe are developing.

In general, we obtain licenses from various partiesthat we deem to be necessary or desirable for the development, manufacture,use, or sale of our products or product candidates. Some of our proprietary 

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products are dependentupon compliance with numerous licenses and agreements. These licenses andagreements may require us to make royalty and other payments, to reasonablyexploit the underlying technology of applicable patents, and to comply withregulatory filings. If we fail to comply with these and other terms in theselicenses and agreements, we could lose the underlying rights to one or more ofthese potential products, which would adversely affect our product developmentand harm our business.

We also have patents,licenses to patents and pending patent applications outside of the UnitedStates, including Europe, Australia, Japan, Canada, Mexico, China, Israel andIndia. Limitations on patent protection in these countries, and the differencesin what constitutes patentable subject matter in these countries outside theUnited States, may limit the protection we have on patents issued or licensedto us outside the United States. In addition, laws of foreign countries may notprotect our intellectual property to the same extent as would laws in theUnited States. To minimize our costs and expenses and maintain effectiveprotection, we focus our foreign patent and licensing activities primarily inthe EU, Canada, Australia and Japan. In determining whether or not to seek apatent or to license any patent in a certain foreign country, we weigh therelevant costs and benefits, and consider, among other things, the marketpotential and profitability, the scope of patent protection afforded by the lawof the jurisdiction and its enforceability, and the nature of terms with anypotential licensees. Failure to obtain adequate patent protection for ourproprietary drugs and technology would impair our ability to be commerciallycompetitive in these markets.

***Trade Secrets and Trademarks***

We also rely on trade secret protection for certainproprietary technology. To protect our trade secrets, we pursue a policy ofhaving our employees and consultants execute proprietary information agreementsupon commencement of employment or consulting relationships with us. Theseagreements provide that all confidential information developed or made known tothe individual during the course of the relationship is confidential except inspecified circumstances.

Registrations andapplications for registration of our trademarks and service marks are asfollows:

·       Ascendhas pending applications in Australia, Canada, China, the EU, India, Japan,Mexico, Norway, Switzerland and the United States;

·       CLIMBhas pending applications in Australia, Canada, China, the EU, India, Japan,Mexico, Norway, Switzerland and the United States;

·       SuperGenis registered in Australia, Canada, the EU, Hong Kong, Japan, South Korea, andTaiwan for use in pharmaceutical sales, and in the United States for use inpharmaceutical sales and for manufacturing services, and is the subject ofpending applications for those goods in Brazil and Vietnam, for use inpharmaceutical sales;

·       Orathecinis registered in Australia, Japan and the EU; pending applications in Canadaand the United States;

·       Dacogenis registered in the United States, Australia, the EU, Iceland, Norway,Switzerland, Turkey, Mexico and Japan; pending applications in Canada, Brazil,India, the Philippines, South Korea and Russia;

·       Mitozytrexis registered in Japan and the EU; pending applications in Canada and theUnited States;

·       Partajectis registered in the EU; pending applications in Canada and the United States;

·       EuroGenis registered in Australia, the EU, Hong Kong, and Japan; pending applicationsin Canada, and the United States; and

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·       “Green bubbles” logo isregistered in Canada, the EU, and the United States.

**Competition**

The pharmaceutical industry in general and oncologysector in particular is highly competitive and subject to significant and rapidtechnological change. There are many companies, both public and private,including well-known pharmaceutical companies that are engaged in thedevelopment and sale of pharmaceutical products for some of the applicationsthat we are pursuing. Our competitors and probable competitors includeSanofi-Aventis, Bristol-Myers Squibb Company, Celgene, Eli Lilly &Co., GlaxoSmithKline, Novartis AG, Pfizer, Pharmion Corp., and others.

Many of our competitors and research institutions areaddressing the same diseases and disease indications and working on products totreat such diseases as we are, and have substantially greater financial,research and development, manufacturing and marketing experience and resourcesthan we do and represent substantial long-term competition for us. Some of ourcompetitors have received regulatory approval for products or are developing ortesting product candidates that compete directly with our product candidates.For example, while we received orphan drug status for Orathecin and there iscurrently no competitor in the oral delivery market for the treatment ofpancreatic cancer, there are approved drugs for the treatment of pancreaticcancer, including gemcitabine by Eli Lilly. In addition, Dacogen facescompetition from Pharmion’s Vidaza and Celgene’s Revlimid.

In addition, many of these competitors, either aloneor together with their customers, have significantly greater experience than wedo in developing products, undertaking pre-clinical testing and clinicaltrials, obtaining FDA and other regulatory approvals, and manufacturing andmarketing products. Accordingly, our competitors may succeed in obtainingpatent protection, receiving FDA approval or commercializing products before wedo. If we commence commercial product sales of our product candidates, we willbe competing against companies with greater marketing and manufacturing capabilities,areas in which we have limited or no experience. See “*Risk Factors—Ifwe fail to compete effectively against other pharmaceutical companies, ourbusiness will suffer.”*

Factors affecting competition in the pharmaceuticalindustry vary depending on the extent to which the competitor is able toachieve a competitive advantage based on proprietary technology. If we are ableto establish and maintain a significant proprietary position with respect toour proprietary products, competition will likely depend primarily on theeffectiveness of the product and the number, gravity and severity of itsunwanted side effects as compared to alternative products.

Extensive research anddevelopment efforts and rapid technological progress characterize the industryin which we compete. Although we believe that our proprietary position may giveus a competitive advantage with respect to our key oncology drug candidates, weexpect competition over development of new products to continue. Discoveries byothers may render our current and potential products noncompetitive. Ourcompetitive position also depends on our ability to attract and retainqualified scientific and other personnel, develop effective proprietaryproducts, implement development and marketing plans, obtain patent protectionand secure adequate capital resources.

**Employees**

As of December 31,2006, we had 89 full-time employees. We use consultants and temporary employeesto complement our staffing. Our employees are not subject to any collectivebargaining agreements, and we consider our relations with employees to be good.As noted previously, in August 2006 we sold the North American rights toNipent and Surface Safe to Mayne Pharma. In February 2007, we completedthe final transition services in connection with this transaction, and theremaining 19 employees in our sales and marketing group were terminated.

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**Geographic AreaFinancial Information**

We operate in one businesssegment—human therapeutics. In 2006 and 2005, 94% of our sales were made in theUnited States and 6% in the EU. In 2004, 89% of our sales were made in theUnited States and 11% were made in the EU.

**AvailableInformation**

We are subject to the information requirements of theSecurities Exchange Act of 1934 (the “Exchange Act”). Therefore, we fileperiodic reports, proxy statements, and other information with the Securitiesand Exchange Commission (“SEC”). Such reports, proxy statements, and otherinformation may be obtained by visiting the Public Reference Room of theSEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330.In addition, the SEC maintains a website (www.sec.gov) that contains reports,proxy and information statements, and other information regarding issuers thatfile electronically.

Financial and otherinformation about us is available on our website at www.supergen.com. We makeavailable on our website, free of charge, copies of our annual report onForm 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Exchange Actas soon as reasonably practicable after filing such material electronically orotherwise furnishing it to the SEC. Information on our website does notconstitute a part of this annual report on Form 10-K.

**ITEM 1A. RISKFACTORS**

*The followingsection lists some, but not all, of the risks and uncertainties that may have amaterial adverse effect on our business, financial condition and results ofoperations. You should carefully consider these risks in evaluating our companyand business. Our business operations may be impaired if any of the followingrisks actually occur, and by additional risks and uncertainties that we do notknow of or that we currently consider immaterial. In such case, the tradingprice of our common stock could decline.*

*This report also contains forward-looking statementsthat involve risks and uncertainties. Our actual results could differmaterially from those anticipated in the forward-looking statements as a resultof certain factors, including the risks described below and elsewhere in thisreport.*

***Risks Related to Dacogen and Nipent***

*Dacogen may not becommercially successful.*

Even though Dacogen hasrecently been approved in the United States and even if it receives regulatoryapproval in Europe at a future date, patients and physicians may not readilyaccept it, which would result in lower than projected sales and causesubstantial harm to our business through the receipt of lower royalty revenuefrom MGI. In addition, pursuant to our license agreement with MGI, we areexpecting to receive payments from MGI in connection with the achievement ofcertain commercial¬ization milestones. If these commercialization milestonesare not met, we will not receive these payments and our financial condition andbusiness would be harmed.

*If Dacogen does not receive regulatory approval inEurope, our future revenues may be limited and our business would be harmed.*

Our European subsidiary, EuroGen Pharmaceuticals Ltd.,submitted an MAA for Dacogen to the EMEA, which submission was accepted forreview on October 25, 2004. MGI and SuperGen determined that additionalclinical data will be required to continue the review of Dacogen in Europe.Therefore, we withdrew the MAA for Dacogen in November 2005.

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In July 2006, MGIannounced that it had sublicensed Dacogen to Cilag GmbH, a Johnson &Johnson company, granting exclusive development and commercialization rights inall territories outside North America. We received 50% of the $10 millionupfront payment and, as a result of both the original agreement with MGI andthis sublicense with Cilag GmbH, may receive up to $23.75 million in futuremilestone payments as they are achieved for Dacogen sales globally.Janssen-Cilag companies will be responsible for conducting regulatory andcommercial activities related to Dacogen in all territories outside NorthAmerica, while MGI retains all commercialization rights and responsibility forall activities in the United States, Canada and Mexico. However, if Dacogen isnever approved in Europe, we will not receive any of the expected royalty paymentsfor commercial sales by Janssen-Cilag and our business will be harmed.

*If the proposedsale of Nipent worldwide rights to Mayne Pharma is not consummated, ourbusiness may suffer.*

We have signed adefinitive agreement to sell the worldwide rights (excluding North America) toNipent to Mayne Pharma. We have expended, and will continue to expendsignificant efforts on closing this transaction. Such efforts are costly fromboth a personnel and financial perspective, distract key personnel from theirordinary responsibilities, and may or may not ultimately result in theconsummation of the transaction. The closing of the transaction is subject tonumerous variables, some of which are beyond our control. If the transaction isnot consummated for any reason, our customers and suppliers may question ourcommitment to continue to develop and commercialize the product and cease doingbusiness with us. Failure to close the transaction may negatively affect ourfinancial results, investor confidence, and ultimately our stock price.

*Our right to receive a significant portion of theconsideration in the transaction with Mayne Pharma is subject to contingenciesbeyond our control.*

In August 2006 wesold the North American rights to Nipent and Surface Safe to Mayne Pharma(USA), Inc. for a total aggregate consideration of approximately $34.0million. $5.0 million of that aggregate amount is a supply holdback, and Mayneis not obligated to release this holdback to us until our Nipent manufacturerhas been qualified and approved by the FDA and Mayne has successfullynegotiated a commercial supply agreement with the product manufacturer. Wecannot control or influence this approval process. In addition, over $3.8million of the aggregate consideration will not be paid to us unless and untilMayne achieves specified targets for sales of Nipent, over the next five years.Achievement of these sales targets are beyond our control. If the conditionsfor the release of the supply holdback are not met, and/or we are not entitledto the approximately $3.8 million of deferred payments, we will not havereceived full value for Nipent. If we are not able to sell our revenuegenerating and otherwise valuable assets for full value, our financialcondition and business will be harmed.

***Risks Related to Our Financial Condition and CommonStock***

*We have a historyof operating losses and we expect to continue to incur losses for theforeseeable future.*

Since inception, we have funded our research anddevelopment activities primarily from private placements and public offeringsof our securities, milestone payments and revenues generated primarily fromsales of Nipent. The North American rights to Nipent were recently sold toMayne Pharma, and we have entered into an agreement with Mayne to sell therights to Nipent in the rest of the world. Our substantial research anddevelopment expenditures and limited revenues have resulted in significant netlosses. We have incurred cumulative losses of $365.3 million from inception throughDecember 31, 2006, and our products have not generated sufficient revenuesto support our business during that time. We expect to continue to incursubstantial operating losses at least through 2007 and may never achieveprofitability.

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Whether we achieveprofitability depends primarily on the following factors:

·       thesuccessful commercialization of Dacogen in North America by MGI;

·       obtainingregulatory approval in Europe and the successful commercialization of Dacogenoutside of North America by the Janssen-Cilag companies;

·       ourability to bring to market other proprietary products that are advancingthrough our internal clinical development infrastructure;

·       ourability to successfully expand our product pipeline through in-licensing andproduct acquisition;

·       ourability to sell and distribute Nipent in Europe until the transfer to Mayne;

·       ourresearch and development efforts, including the timing and costs of clinicaltrials;

·       ourcompetition’s ability to develop and bring to market competing products;

·       ourability to control costs and expenses associated with manufacturing,distributing and selling our products, as well as general and administrativecosts related to conducting our business;

·       costsand expenses associated with entering into licensing and other collaborativeagreements; and

·       delaysin production of Dacogen or inadequate commercial sales of other products,after regulatory approvals have been received.

Our products and productcandidates, even if successfully developed and approved, may not generatesufficient or sustainable revenues to enable us to achieve or sustainprofitability.

*We will require additional funding to expand ourproduct pipeline and commercialize new drugs, and if we are unable to raise thenecessary capital or to do so on acceptable terms, our planned expansion andcontinued chances of survival could be harmed.*

We will continue to spendsubstantial resources on expanding our product pipeline, selling anddistributing our existing and future products, and conducting research anddevelopment, including clinical trials for our product candidates. Weanticipate that our capital resources will be adequate to fund operations andcapital expenditures at least through 2007. However, if we experienceunanticipated cash requirements during this period, we could require additionalfunds much sooner. We may raise money by the sale of our equity securities ordebt, or the exercise of outstanding warrants and stock options by the holdersof such warrants and options. However, given uncertain market conditions andthe volatility of our stock price, we may not be able to sell our securities inpublic offerings or private placements at prices and/or on terms that arefavorable to us, if at all. Also, the dilutive effect of additional financingscould adversely affect our per share results. We may also choose to obtainfunding through licensing and other contractual agreements. For example, welicensed the worldwide rights to the development, commercialization anddistribution of Dacogen to MGI. Such arrangements may require us to relinquishour rights to our technologies, products or marketing territories, or to grantlicenses on terms that are not favorable to us. If we fail to obtain adequatefunding in a timely manner, or at all, we will be forced to scale back ourproduct development activities, or be forced to cease our operations.

*Our collaborative relationship with MGI may notproduce the financial benefits that we are anticipating, which could cause ourbusiness to suffer.*

In addition to raisingmoney by selling our equity securities to MGI in connection with the licenseagreement, we also expect to record development and license revenue frompayments made to us by MGI upon the achievement of regulatory andcommercialization milestones. However, we may fail to achieve these milestones,either because we are unable to secure regulatory approval of Dacogen in Europeor 

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Asia ordue to MGI’s or Janssen-Cilag’s inability to expend the resources to commencesales of Dacogen as prescribed by the license agreement. In addition, thelicense agreement provides that MGI will pay us (i) a certain portion ofrevenues payable to MGI as a result of MGI sublicensing the rights to market,sell and/or distribute Dacogen, to the extent such revenues are in excess ofthe milestone payments, and (ii) a 20% royalty increasing to a maximum of30% on annual worldwide net sales of Dacogen. We cannot guarantee that we willcontinue to receive these payments, and we cannot be assured that MGI willexpend the resources to expand sales of Dacogen in North America, or that theJanssen-Cilag companies will expend the resources to sell it in Europe andelsewhere, or that either company be successful in doing so.

*Our equity investment in AVI exposes us to equityprice risk and any impairment charge would affect our results of operations.*

We are exposed to equityprice risk on our equity investment in AVI. Currently we own 2,384,211 sharesof AVI. During the year ended December 31, 2004, we recorded a write-downof $7.9 million related to an other than temporary decline in the value of ourequity investment in AVI, resulting in a reduction of our cost basis in the AVIshares. Under our accounting policy, marketable equity securities are presumedto be impaired if their fair value is less than their cost basis for more thansix months, absent compelling evidence to the contrary. As of June 30,2004, the AVI shares had been trading below our original cost basis for morethan six months. Since there was no compelling evidence to the contrary, werecorded the impairment charge of $7.9 million in our results ofoperations. The amount of the charge was based on the difference between themarket price of the shares as of June 30, 2004 and our adjusted costbasis. The public trading prices of the AVI shares have fluctuatedsignificantly since we purchased them and could continue to do so. If thepublic trading prices of these shares continue to trade below their new costbasis in future periods, we may incur additional impairment charges relating tothis investment, which in turn will affect our results of operations.

***Product Development and Regulatory Risks***

*Before we can seek regulatory approval of any of ourproduct candidates, we must complete clinical trials, which are expensive andhave uncertain outcomes.*

Most of our products are in the developmental stageand, prior to their sale, will require regulatory approval and the commitmentof substantial resources. Before obtaining regulatory approvals for thecommercial sale of any of our product candidates, we must demonstrate throughpre-clinical testing and clinical trials that our product candidates are safeand effective for use in humans.

We have a portfolio of cancer drugs in various stagesof development. In addition, we expect to commence new clinical trials fromtime to time in the course of our business as our product development workcontinues. Conducting clinical trials is a lengthy, time consuming andexpensive process and the results are inherently uncertain. We have incurredand will continue to incur substantial expense for, and we have devoted andexpect to continue to devote a significant amount of time to, pre-clinicaltesting and clinical trials. However, regulatory authorities may not permit usto undertake any additional clinical trials for our product candidates. If weare unable to complete our clinical trials, our business will be severelyharmed and the price of our stock will likely decline.

We have ongoing researchand pre-clinical projects that may lead to product candidates, but we have notbegun clinical trials for these projects. If we do not successfully completeour pre-clinical trials, we could not commence clinical trials as planned.

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*Our clinical trials may be delayed or terminated,which would prevent us from seeking necessary regulatory approvals.*

Completion ofclinical trials may take several years or more. The length of a clinical trialvaries substantially according to the type, complexity, novelty and intendeduse of the product candidate. For example, our three Phase III Orathecinclinical trials lasted from 1998 through the end of 2003. The length of timeand complexity of these studies make statistical analysis difficult andregulatory approval unpredictable. The commencement and rate of completion ofour clinical trials may be delayed by many factors, including:

·       ineffectivenessof the study compound, or perceptions by physicians that the compound is noteffective for a particular indication;

·       inabilityto manufacture sufficient quantities of compounds for use in clinical trials;

·       inabilityto obtain FDA approval of our clinical trial protocols;

·       slowerthan expected rate of patient recruitment;

·       inabilityto adequately follow patients after treatment;

·       difficultyin managing multiple clinical sites;

·       unforeseensafety issues;

·       lackof efficacy demonstrated during the clinical trials; or

·       governmentor regulatory delays.

If we are unable toachieve a satisfactory rate of completion of our clinical trials, our businesswill be significantly harmed.

*We may be required to suspend, repeat or terminate ourclinical trials if they are not conducted in compliance with regulatoryrequirements.*

Our clinical trials mustbe conducted in accordance with the FDA’s regulations and are subject tocontinuous oversight by the FDA and institutional review boards at the medicalinstitutions where the clinical trials are conducted. We outsource certainaspects of our research and development activities to contract researchorganizations (“CROs”). We have agreements with these CROs for certain of ourclinical programs. We and our CROs are required to comply with GCP regulationsand guidelines enforced by the FDA for all of our products in clinicaldevelopment. The FDA enforces GCPs through periodic inspections of studysponsors, principal investigators, and study sites. If our CROs or we fail tocomply with applicable GCPs, the clinical data generated in our studies may bedeemed unreliable and the FDA may require us to perform additional studiesbefore approving our applications. In addition, our clinical trials must beconducted with product candidates produced under current GMP’s, and may requirea large number of test subjects. Our failure to comply with these regulationsmay require us to repeat clinical studies, which would delay the regulatoryapproval process.

*We may be required to suspend, repeat or terminate ourclinical trials if later trial results fail to demonstrate safety and efficacy,or if the results are negative, inconclusive or if they fail to demonstratesafety or efficacy.*

Our clinical trials may be suspended at any time if weor the FDA believe the patients participating in our studies are exposed tounacceptable health risks or if we or the FDA find deficiencies in the conductof these trials. Adverse medical events during a clinical trial could cause usto terminate or repeat a clinical trial.

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We may encounter other problems and failures in ourstudies that would cause us or the FDA to delay or suspend the studies. Even ifwe achieve positive interim results in clinical trials, these results do notnecessarily predict final results, and acceptable results in early trials maynot be repeated in later trials. A number of companies in the pharmaceuticalindustry have suffered significant setbacks in advanced clinical trials, evenafter achieving promising results in earlier trials.

Negative or inconclusiveresults during a clinical trial could cause us to terminate or repeat aclinical trial. The potential failures would delay development of our productcandidates, hinder our ability to conduct related pre-clinical testing andclinical trials and further delay the commencement of the regulatory approvalprocess. Further, the failures or perceived failures in our clinical trialswould delay our product development and the regulatory approval process, damageour business prospects, make it difficult for us to establish collaboration andpartnership relationships and negatively affect our reputation and competitiveposition in the pharmaceutical industry. Finally, if we are required to conductother clinical trials for the product candidates, the additional trials wouldrequire substantial funding and time, and we may be unable to obtain funding toconduct such clinical trials.

*Our failure to obtain regulatory approvals to marketour product candidates in foreign countries and delays caused by governmentregulation would adversely affect our anticipated revenues.*

Sales of our products in foreign jurisdictions will besubject to separate regulatory requirements and marketing approvals. Approvalin the United States, or in any one foreign jurisdiction, does not ensureapproval in any other jurisdiction. The process of obtaining foreign approvalsmay result in significant delays, difficulties and expenses for us, and mayrequire additional clinical trials. Although many of the regulations applicableto our products in these foreign countries are similar to those promulgated bythe FDA, many of these requirements also vary widely from country to country,which could delay the introduction of our products in those countries. Failureto comply with these regulatory requirements or to obtain required approvalswould impair our ability to commercialize our products in foreign markets.

Even if regulatoryapproval of our products is obtained, later discovery of previously unknownproblems may result in restrictions of a product, including withdrawal of thatproduct from the market. Further, governmental approval may subject us toongoing requirements for post-marketing studies. For example, despite receiptof governmental approval, the facilities of our third-party manufacturersare still subject to unannounced inspections by the FDA and must continue tocomply with GMPs and other regulations. These regulations govern all areas ofproduction, record keeping, personnel and quality control. If we or our third-partymanufacturers fail to comply with any of the manufacturing regulations, we maybe subject to, among other things, product seizures, recalls, fines,injunctions, suspensions or revocations of marketing licenses, operatingrestrictions and criminal prosecution.

*If we are unable tocomply with environmental laws and regulations, our business may be harmed.*

We are subject to federal, state and local laws andregulations governing the use, manufacture, storage, handling and disposal ofhazardous materials and waste products. We currently maintain a supply ofbiohazardous materials at our facilities. We believe our safety procedures forthese materials comply with all applicable environmental laws and regulations,and we carry insurance coverage we believe is adequate for the size of ourbusiness. However, we cannot entirely eliminate the risk of accidentalcontamination or injury from these materials. If an accident or environmentaldischarge occurs, we could be held liable for any resulting damages, whichcould exceed our insurance coverage and financial resources.

We currently outsourcecertain of our research and development programs involving the controlled useof biohazardous materials. We believe our collaborators have in place safetyprocedures for these 

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materialsthat comply with governmental standards. Nevertheless, if an accident doesoccur, our research and product development will be negatively affected.

***Additional Risks Associated with Our Business***

*If the third-party manufacturers upon whom werely fail to produce our products in the volumes that we require on a timelybasis, or fail to comply with stringent regulations applicable topharmaceutical drug manufacturers, we may face delays in the delivery of, or beunable to meet demand for, our products.*

Because we have nomanufacturing facilities, we rely on third parties for manufacturing activitiesrelated to all of our products. As we develop new products, we must establishand maintain relationships with manufacturers to produce and package sufficientsupplies of our finished pharmaceutical products. Reliance on third partymanufacturing presents the following risks:

·       delaysin scale-up to quantities needed for multiple clinical trials, or failure to(a) manufacture such quantities to our specifications or (b) deliversuch quantities on the dates we require, which could cause delay or suspensionof clinical trials, regulatory submissions and commercialization of ourproducts;

·       inabilityto fulfill our future commercial needs if market demand for our productsincreases suddenly, which would require us to seek new manufacturingarrangements and may result in substantial delays in meeting market demand;

·       potentialrelinquishment or sharing of intellectual property rights to any improvementsin the manufacturing processes or new manufacturing processes for our products;and

·       unannouncedongoing inspections by the FDA and corresponding state agencies for compliancewith GMPs, regulations and foreign standards, and failure to comply with any ofthese regulations and standards may subject us to, among other things, productseizures, recalls, fines, injunctions, suspensions or revocations of marketinglicenses, operating restrictions and criminal prosecution.

Any of these factors coulddelay clinical trials or commercialization of our product candidates underdevelopment, interfere with current sales and entail higher costs.

*Our business may be harmed if the manufacture of ourproducts is interrupted or discontinued.*

We may be unable tomaintain our relationships with our third-party manufacturers. If we needto replace or seek new manufacturing arrangements, we may have difficultylocating and entering into arrangements with qualified contract manufacturerson acceptable terms, if at all. We are aware of only a limited number ofcompanies on a worldwide basis who operate manufacturing facilities in whichour products can be manufactured to our specifications and in compliance withGMPs. It could take several months, or significantly longer, for a new contractmanufacturing facility to obtain FDA approval and to develop substantiallyequivalent processes for the production of our products. We may not be able tocontract with any of these companies on acceptable terms, if at all. Forexample, the company that had been purifying Nipent filed for reorganizationunder Chapter 11 and ceased operations in late 2004. We contracted with anothermanufacturer for the purification of Nipent, but this manufacturer has not yetreceived qualification by the FDA. If the new manufacturer fails to get finalFDA qualification or goes out of business, we will be unable to satisfy theconditions necessary to receive from Mayne Pharma the $5.0 million held backfrom us pursuant to the terms of that transaction.

*If our suppliers cannot provide the components werequire, our product sales and revenue could be harmed.*

We rely on third-partysuppliers to provide us with numerous components used in our products underdevelopment. Relying on third-party suppliers makes us vulnerable tocomponent failures and interruptions in supply, either of which could impairour ability to conduct clinical trials or to ship our 

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productsto our customers on a timely basis. Using third-party suppliers makes itdifficult and sometimes impossible for us to maintain quality control, manageinventory and production schedules and control production costs. Vendor leadtimes to supply us with ordered components vary significantly and can exceedsix months or more. Both now and as we expand our need for manufacturingcapacity, we cannot be sure that our suppliers will furnish us with requiredcomponents when we need them. These factors could make it difficult for us toeffectively and efficiently manufacture our products, and could adverselyimpact our clinical trials, product development and sales of our products.

Some suppliers are ouronly source for a particular component, which makes us vulnerable to costincreases and supply interruptions. We generally rely on one manufacturer foreach product.

Vendors may decide tolimit or eliminate sales of certain products to the medical industry due toproduct liability or other concerns. In the event one of our sole sourcesuppliers decides not to manufacture the component, goes out of business, ordecides to cut off our supply, we may be unable to locate replacement supplysources, or the sources that we may locate may not provide us with similarreliability or pricing and our business could suffer. If we cannot obtain anecessary component, we may need to find, test and obtain regulatory approvalfor a replacement component, produce the component or redesign the relatedproduct, which would cause significant delay and could increase ourmanufacturing costs. Any of these events could adversely impact our sales andresults of operations.

*If we are not able to maintain and successfullyestablish new collaborative and licensing arrangements with third parties, ourproduct development and business will be harmed.*

Our business model is based on establishingcollaborative relationships with other parties both to license compounds uponwhich our products and technologies are based and to manufacture our productsor our collaborators’ products. It is critical that we gain access to compoundsand technologies to license for further development. Due to the expense of thedrug approval process we must have relationships with establishedpharmaceutical companies to offset some of our development costs in exchangefor a combination of development, marketing and distribution rights.

From time to timewe enter into discussions with various companies regarding the establishment ofnew collaborations. If we are not successful in establishing new partners forour product candidates, we may not be able to pursue further development ofsuch product candidates and/or may have to reduce or cease our currentdevelopment programs, which would materially harm our business. Even if we aresuccessful in establishing new collaborations, they are subject to numerousrisks and uncertainties including:

·       ourability to negotiate acceptable collaborative arrangements;

·       thecollaboration making us less attractive to potential acquirers;

·       freedomof our collaborative partners to pursue alternative technologies either ontheir own or with others, including our competitors, for the diseases targetedby our programs and products;

·       thepotential failure of our partners to fulfill their contractual obligations ortheir decision to terminate our relationships, in which event we may berequired to seek other partners, or expend substantial resources to pursuethese activities independently; and

·       ourability to manage, interact and coordinate our timelines and objectives with ourcollaborative partners may not be successful.

In addition, ourcollaborators may undergo business combinations, which could have the effect ofmaking the collaboration with us less attractive to them for a number ofreasons. For example, if an existing collaborator purchases a company that isone of our competitors, that company may be less willing to continue itscollaboration with us. A company that has a strategy of purchasing companieswith 

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attractivetechnologies might have less incentive to enter into a collaboration agreementwith us. Moreover, disputes may arise with respect to the ownership of rightsto any technology or products developed with any current or futurecollaborator. Lengthy negotiations with potential collaborators ordisagreements between us and our collaborators may lead to delays in ortermination of the research, development or commercialization of productcandidates or result in time consuming and expensive litigation or arbitration.

*Our collaborative relationships with third partiescould cause us to expend significant funds on development costs with noassurance of financial return.*

From time to time we enterinto collaborative relationships with third parties to co-develop and marketproducts. These relationships require substantial financial commitments fromus, and at the same time the product developments are subject to the sameregulatory requirements, risks and uncertainties associated with thedevelopment of our other product candidates. The compounds that are the subjectof these collaborative agreements may prove to be ineffective, may fail toreceive regulatory approvals, may be unprotectable by patents or otherintellectual property rights, or may not be otherwise commercially viable. Ifthese collaborative relationships are not successful, our product developmentswill be adversely affected, and our investments and efforts devoted to theproduct developments will be wasted.

*Our ability to protect our intellectual propertyrights will be critically important to the success of our business, and we maynot be able to protect these rights in the United States or abroad.*

The success of our operations depends in part on ourability to obtain patents, protect trade secrets, operate without infringingthe proprietary rights of others and enforce our proprietary rights againstaccused infringers.

We actively pursue a policy of seeking patentprotection when applicable for our proprietary products and technologies,whether they are developed in-house or acquired from third parties. Weattempt to protect our intellectual property position by filing United Statesand foreign patent applications related to our proprietary technology,inventions and improvements that are important to the development of ourbusiness. To date, we have acquired licenses to or assignments of over 65 U.S.patents covering various aspects of our proprietary drugs and technologies,including 41 patents for various aspects of Orathecin and related products,seven patents for our paclitaxel related products, six patents for variousaspects of Dacogen and related products. We have been granted patents and havereceived patent licenses relating to our proprietary formulation technology,non-oncology and non-core technologies, among which at least 10 patentsare issued or licensed to us. In addition, we are prosecuting a number ofpatent applications for drug candidates that we are not actively developing atthis time.

We also have patents, licenses to patents and pendingpatent applications in Europe, Australia, Japan, Canada, Mexico, China, Israeland India among other countries. Limitations on patent protection, and thedifferences in what constitutes patentable subject matter, may limit theprotection we have on patents issued or licensed to us in these countries. Inaddition, laws of foreign countries may not protect our intellectual propertyto the same extent as would laws in the United States. To minimize our costsand expenses and maintain effective protection, we focus our foreign patent andlicensing activities primarily in the European Union, Canada, Australia andJapan. In determining whether or not to seek patent protection or to licenseany patent in a foreign country, we weigh the relevant costs and benefits, andconsider, among other things, the market potential and profitability, the scopeof patent protection afforded by the law of the jurisdiction and itsenforceability, and the nature of terms with any potential licensees. Failureto obtain adequate patent protection for our proprietary drugs and technologywould impair our ability to be commercially competitive in these markets.

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The pharmaceuticalindustry is characterized by a large number of patent filings involving complexlegal and factual questions, and therefore we cannot predict with certaintywhether our patents will be enforced effectively. Competitors may have filed applicationsfor, or been issued patents on, products or processes that compete with or aresimilar to ours. We may not be aware of all of the patents potentially adverseto our interests which may have been issued to others. In addition, thirdparties may challenge, invalidate or circumvent any of our patents. Thus, anypatents that we own or license from third parties may not provide adequateprotection against competitors, if at all. Our pending patent applications andthose we may file in the future, or those we may license from third parties,may not result in patents being issued with adequate claim scope, if at all.

In addition to pursuingpatent protection in appropriate instances, we also rely on trade secretprotection or regulatory marketing exclusivity for unpatented proprietarytechnology. However, trade secrets are difficult to protect. Our trade secretsor those of our collaborators may become known or may be independentlydiscovered by others.

In the pharmaceuticalindustry there has been, and we believe that there will continue to be,significant litigation regarding patent and other intellectual property rights.Claims may be brought against us in the future based on patents held by others.These persons could bring legal actions against us claiming damages and seekingto enjoin clinical testing, manufacturing and marketing of the affectedproduct. If we become involved in litigation, it could consume a substantialportion of our resources, regardless of the outcome of the litigation. If alawsuit against us is successful, in addition to any potential liability fordamages, we could be required to obtain a license to continue to manufacture ormarket the affected product. We cannot assure you that we would prevail in alawsuit filed against us or that we could obtain any licenses required underany patents on acceptable terms, if at all.

Our proprietary productsare dependent upon compliance with numerous licenses and agreements. Theselicenses and agreements require us to make royalty and other payments,reasonably exploit the underlying technology of the applicable patents, andcomply with regulatory filings. If we fail to comply with these licenses andagreements, we could lose the underlying rights to one or more of thesepotential products, which would adversely affect our product development andharm our business.

*If we fail to compete effectively against otherpharmaceutical companies, our business will suffer.*

The pharmaceuticalindustry in general and the oncology sector in particular is highly competitiveand subject to significant and rapid technological change. Our competitors andprobable competitors include companies such as Aventis SG, Bristol-MyersSquibb Company, Celgene, Eli Lilly & Co., GlaxoSmithKline, NovartisAG, Pfizer, Pharmion Corp. and others.

Many of our competitorsand research institutions are addressing the same diseases and diseaseindications and working on products to treat such diseases as we are, and havesubstantially greater financial, research and development, manufacturing andmarketing experience and resources than we do. Some of our competitors havereceived regulatory approval for products, or are developing or testing productcandidates that compete directly with, our product candidates. For example,Dacogen faces competition from Pharmion’s Vidaza, and Celgene’s Revlimid.

Many of these competitorshave significantly greater experience than we do in developing products,undertaking pre-clinical testing and clinical trials, obtaining FDA and otherregulatory approvals, and manufacturing and marketing products. Accordingly,our competitors may succeed in obtaining patent protection, receiving FDAapproval or commercializing products before we do. If we commence sales of ourproduct candidates, we will be competing against companies with greatermarketing expertise and manufacturing capabilities, areas in which we havelimited or no experience.

We also face intense competition from other companiesfor collaborative relationships, for establishing relationships with academicand research institutions, and for licenses to proprietary technology.

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Our competitive positionsin our generic drugs are uncertain and subject to risks. The market for genericdrugs, including the pricing for generic drugs, is extremely competitive. As aresult, unless our generic drugs are the first or among the initial few tolaunch, there is a high risk that our products would not gain meaningful marketshare, or we would not be able to maintain our price and continue the productline. Moreover, marketing of generic drugs is also subject to regulatoryapproval, and if we were not able to obtain such approval before ourcompetitors, we would lose our competitive advantage. Failure to maintain ourcompetitive position could have a material adverse effect on our business andresults of operations.

*Thepharmaceutical industry in general and the oncology sector in particular issubject to significant and rapid technological change. Developments bycompetitors may render our product candidates or technologies obsolete ornon-competitive.*

Our competitors maysucceed in developing technologies or products that are more effective thanours. Additionally, our products that are under patent protection face intensecompetition from competitors’ proprietary products. This competition mayincrease as new products enter the market.

Anumber of our competitors have substantially more capital, research anddevelopment, regulatory, manufacturing, marketing, human and other resourcesand experience than we have. As a result, our competitors may:

·       developproducts that are more effective or less costly than any of our current orfuture products or that render our products obsolete;

·       produceand market their products more successfully than we do;

·       establishsuperior proprietary positions; or

·       obtainFDA approval for labeling claims that are more favorable than those for ourproducts.

We will also faceincreasing competition from lower-cost generic products after patents on ourproprietary products expire. Loss of patent protection typically leads to arapid decline in sales for that product and could affect our future results. Asnew products enter the market, our products may become obsolete or ourcompetitors’ products may be more effective or more effectively marketed andsold than our products. Technological advances, competitive forces and loss ofintellectual property protection rights for our products may render ourproducts obsolete.

*We are developing proprietary formulations to improvethe profile of our products*

Our proprietaryformulation technology is a platform technology that employs the use of aninert chemical excipient, cyclodextrin, combined with a drug. Most anti-cancerdrugs are cytotoxic, and most must be administered intravenously. If a vein ismissed on injection, the drug can leak to surrounding tissue, causingulceration that sometimes requires plastic surgery to correct. Our proprietaryformulation technology is designed to “shield” the drug from the injectionsite, thus providing the patient protection from tissue ulceration. Thistechnology may increase the relative solubility of hard-to-dissolve anti-cancerdrugs, hence increasing its stability or shelf life. However, each of thesebenefits must be supported by appropriate data and approved by the FDA beforewe can make any claim in this regard. Our first product utilizing ourproprietary formulation technology, a formulation of generic mitomycin, wasapproved by the FDA in November 2002 as Mitozytrex (mitomycin forinjection) for use in the therapy of disseminated adenocarcinoma of the stomachor pancreas in proven combinations with other approved chemotherapeutic agentsand as palliative treatment when other modalities have failed. We cannotpromote Mitozytrex as providing any injection site ulceration protection, norcan we promote any increased stability, solubility or shelf life extension, ascompared to generic mitomycin. We would be required to develop and submitadditional data to the FDA and receive FDA approval before we could make these claims.

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Although no funds were spent in 2005 or 2006, we havepreviously spent approximately $6.4 million on developing and marketingour generic and proprietary formulation products. We have completed ourpre-commercial investment in developing Mitozytrex, and as of now we have notcommitted to an internal budget for additional proprietary formulationdevelopment programs. In addition, we have no further generic drug developmentcommitments, as we are focusing on developing our proprietary drug candidates.

We do not hold anyintellectual property rights as to the underlying compounds on which ourgeneric or proprietary formulation products are based. We may in the futureevaluate the generic drug market and develop additional generic or proprietaryproducts based on these compounds, which may also be the subject of method,formulation and manufacturing process patents held by third parties. Ourdevelopment of generic or proprietary products may also take place prior to,but in anticipation of, the expected expiration of existing patent protectionfor drugs developed by third parties. However, if existing patent protection onsuch products is otherwise maintained, extended or expanded, it is unlikelythat we will be able to market our own generic or proprietary formulationproducts without obtaining a license from the patent owner, which may not beavailable on commercially acceptable terms, if at all.

*We may be subjectto product liability lawsuits and our insurance may be inadequate to coverdamages.*

Clinical trials andcommercial use of our current and potential products may expose us to liabilityclaims from the use or sale of these products. Consumers, healthcare providers,pharmaceutical companies and others selling such products might make claims ofthis kind. We may experience financial losses in the future due to productliability claims. We have obtained limited product liability insurance coveragefor our products and clinical trials, under which the coverage limits are$10.0 million per occurrence and $10.0 million in the aggregate. Wedo not know whether this coverage will be adequate to protect us in the eventof a claim. We may not be able to obtain or maintain insurance coverage in thefuture at a reasonable cost or in sufficient amounts to protect us againstlosses. If third parties bring a successful product liability claim or seriesof claims against us for uninsured liabilities or in excess of insuredliabilities, we may not have sufficient financial resources to completedevelopment or commercialization of any of our product candidates and ourbusiness and results of operations will be adversely affected.

*If we are unable to attract and retain additional,highly skilled personnel required for the expansion of our activities, ourbusiness will suffer.*

Further, our success isdependent on key personnel, including members of our senior management andscientific staff. If any of our executive officers decides to leave and wecannot locate a qualified replacement in time to allow a smooth transition, ourbusiness operation may be adversely affected. To successfully expand ouroperations, we will need to attract and retain additional highly skilledindividuals, particularly in the areas of clinical administration, pre-clinicaland development research, manufacturing and finance. We compete with othercompanies for the services of existing and potential employees, however to theextent these employees favor larger, more established employers, we may be at adisadvantage.

*Earthquake or other natural or man-made disasters andbusiness interruptions could adversely affect our business.*

Our operations arevulnerable to interruption by fire, power loss, floods, telecommunicationsfailure and other events beyond our control. In addition, our operations aresusceptible to disruption as a result of natural disasters such as earthquakes.So far we have never experienced any significant disruption of our operationsas a result of earthquakes or other natural disasters. Although we have acontingency recovery plan, any significant business interruption could causedelays in our drug development and sales and harm our business.

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*Provisions in our certificate of incorporation, bylawsand applicable Delaware law may prevent or discourage third parties orstockholders from attempting to replace our management.*

Anti-takeoverprovisions of our certificate of incorporation and bylaws make it moredifficult for a third party to acquire us, even if doing so would be beneficialto our stockholders. These provisions include:

·       authorizationof the issuance of up to 2,000,000 shares of our preferred stock;

·       eliminationof cumulative voting; and

·       eliminationof stockholder action by written consent.

Our bylaws establish procedures, including noticeprocedures, with regard to the nomination, other than by or at the direction ofour board of directors, of candidates for election as directors or forstockholder proposals to be submitted at stockholder meetings.

We are also subject to Section 203 of theDelaware General Corporation Law, an anti-takeover provision. In general,Section 203 of the Delaware General Corporation Law prevents a stockholderowning 15% or more of a corporation’s outstanding voting stock from engaging inbusiness combinations with a Delaware corporation for three years following thedate the stockholder acquired 15% or more of a corporation’s outstanding votingstock. This restriction is subject to exceptions, including the approval of theboard of directors and of the holders of at least two-thirds of the outstandingshares of voting stock not owned by the interested stockholder.

We believe that thebenefits of increased protection of our potential ability to negotiate with theproponents of unfriendly or unsolicited proposals to acquire or restructure usoutweigh the disadvantages of discouraging those proposals because, among otherthings, negotiation of those proposals could result in an improvement of theirterms. Nevertheless, these provisions are expected to discourage differenttypes of coercive takeover practices and inadequate takeover bids and toencourage persons seeking to acquire control of our company to first negotiatewith us, and may have the effect of preventing or discouraging third parties orstockholders from attempting to replace our management.

**ITEM 1B. UNRESOLVEDSTAFF COMMENTS.**

None

**ITEM 2. PROPERTIES.**

Ourprincipal administrative facility is currently located in leased general officespace, containing approximately 50,000 square feet, in Dublin, California,under a lease that expires in November 2010. Our drug formulationlaboratory operations are located in a 10,000 square foot industrial buildingthat we own in Pleasanton, California. We believe the above properties areadequate and suitable for our operations in the foreseeable future. We arecurrently leasing 4,300 square feet of space for our drug discovery laboratoryoperations in Salt Lake City, Utah. The lease on this space expires inAugust 2007, and we are actively searching for a larger facility to housethese operations.

**ITEM 3. LEGALPROCEEDINGS.**

We are not currentlysubject to any pending material legal proceedings.

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

None

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**PART II**

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

**Market for CommonStock**

Our common stock trades on the Nasdaq Global Marketunder the symbol “SUPG.”  The followingtable sets forth the high and low sales information for our common stock foreach quarterly period in the two most recent fiscal years as reported on theNasdaq Global Market:

| ** **                             | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|
| **2006**                               |       |     |       |    |       |
| Quarter ended  March 31, 2006     |       | $        | 5.97       |    | $          | 4.80 |   |
| Quarter ended  June 30, 2006      |       | 5.82     |       | 3.18    |       |
| Quarter ended  September 30, 2006 |       | 5.01     |       | 3.01    |       |
| Quarter ended  December 31, 2006  |       | 5.78     |       | 4.51    |       |
| **2005**                               |       |     |       |    |       |
| Quarter ended  March 31, 2005     |       | $        | 6.31       |    | $          | 4.29 |   |
| Quarter ended  June 30, 2005      |       | 5.20     |       | 4.00    |       |
| Quarter ended  September 30, 2005 |       | 7.24     |       | 4.80    |       |
| Quarter ended  December 31, 2005  |       | 6.48     |       | 4.93    |       |

 

**Holders of Record**

As of March 6, 2007,there were 571 holders of record of the common stock and approximately 19,700beneficial stockholders.

**Dividends**

We have never paid cashdividends on our capital stock and do not expect to pay any dividends in theforeseeable future. We intend to retain future earnings, if any, for use in ourbusiness.

**Recent Sales ofUnregistered Securities**

None.

**Purchase of EquitySecurities by the Issuer**

None.

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**Company Stock PricePerformance Graph**

The performance graph below is required by the SEC andshall not be deemed to be incorporated by reference by any general statementincorporating by reference this annual report on Form 10-K into anyfiling under the Securities Act or the Securities Exchange Act except to theextent we specifically incorporate this information by reference and shall nototherwise be deemed soliciting material or filed under such Acts.

The graph compares ourcumulative total stockholder return with those of the Nasdaq Composite Indexand the Nasdaq Pharmaceutical Index. The graph assumes that $100 was investedon December 31, 2001 in the Company’s common stock and in the NasdaqComposite Index and the Nasdaq Pharmaceutical Index, including reinvestment ofdividends. Note that historic stock price performance should not be consideredindicative of future stock price performance.

****

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**ITEM 6. SELECTEDFINANCIAL DATA.**

The information set forthbelow is not necessarily indicative of results of future operations and shouldbe read in conjunction with the financial statements and notes theretoappearing in Item 15 of Part IV of this report.

| ** **                                                          | ** ** | **Year ended December 31,**                         | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**                      | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenue                                                       |       | $                                                                  | 38,083     |   | $ | 30,169 |   | $ | 31,993 |   | $ | 11,494 |   | $ | 15,269 |   |
| Cost of product revenue                                             |       | 2,003                                                              |       | 3,051 |   | 4,135 |   | 3,865 |   | 4,491 |   |
| Research and development                                            |       | 16,544                                                             |       | 15,059 |   | 23,978 |   | 26,312 |   | 29,895 |   |
| Selling, general and  administrative                                |       | 24,714                                                             |       | 28,046 |   | 28,800 |   | 24,436 |   | 23,525 |   |
| Acquisition of  in-process research and development                 |       | 16,318                                                             |       | — |   | — |   | — |   | — |   |
| Loss from operations                                                |       | (21,496                                                            | )          | (15,987 | ) | (24,920 | ) | (43,119 | ) | (42,642 | ) |
| Other income (expense)                                              |       | 5,009                                                              |       | 1,505 |   | (21,940 | ) | (10,351 | ) | (6,829 | ) |
| Net loss                                                            |       | $                                                                  | (16,487    | ) | $ | (14,482 | ) | $ | (46,860 | ) | $ | (53,470 | ) | $ | (49,471 | ) |
| Basic and diluted net  loss per common share                        |       | $                                                                  | (0.31      | ) | $ | (0.28 | ) | $ | (1.04 | ) | $ | (1.56 | ) | $ | (1.52 | ) |
| Shares used to compute  basic and diluted net loss per common share |       | 53,439                                                             |       | 51,309 |   | 44,953 |   | 34,276 |   | 32,542 |   |

 

| ** **                                                                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**               | ** ** |
| **Consolidated Balance Sheet  Data:**                                                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents, marketable securities, investments, and restricted cash and  investments |       | $                                     | 78,585     |   | $ | 60,289 |   | $ | 67,047 |   | $ | 39,926 |   | $ | 39,982 |   |
| Other current  assets                                                                             |       | 3,984                                 |       | 8,972 |   | 22,444 |   | 9,035 |   | 9,744 |   |
| Property, plant  and equipment, net                                                               |       | 3,752                                 |       | 2,907 |   | 3,635 |   | 4,420 |   | 5,443 |   |
| Other assets                                                                                      |       | 1,725                                 |       | 1,103 |   | 1,531 |   | 1,355 |   | 2,164 |   |
| Total assets                                                                                      |       | $                                     | 88,046     |   | $ | 73,271 |   | $ | 94,657 |   | $ | 54,736 |   | $ | 57,333 |   |
| Convertible debt,  net of discounts                                                               |       | $                                     | —     |   | $ | — |   | $ | — |   | $ | 13,593 |   | $ | — |   |
| Other current  liabilities                                                                        |       | 21,276                                |       | 8,042 |   | 20,517 |   | 11,821 |   | 7,548 |   |
| Non-current  liabilities                                                                          |       | 938                                   |       | 972 |   | 927 |   | 2,475 |   | 1,783 |   |
| Stockholders’  equity                                                                        |       | 65,832                                |       | 64,257 |   | 73,213 |   | 26,847 |   | 48,002 |   |
| Total liabilities and  stockholders’ equity                                                  |       | $                                     | 88,046     |   | $ | 73,271 |   | $ | 94,657 |   | $ | 54,736 |   | $ | 57,333 |   |

 

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

*Youshould read the following discussion together with our consolidated financialstatements and related notes included elsewhere in this report. The results discussedbelow are not necessarily indicative of the results to be expected in anyfuture periods. Our disclosure and analysisin this section of the report also contain forward-looking statements.When we use the words “anticipate,” “estimate,” “project,” “intend,” “expect,”“plan,” “believe,” “should,” “likely” and similar expressions, we are makingforward-looking statements. Forward-looking statements provide ourcurrent expectations or forecasts of future events. In particular, thesestatements include statements such as: our estimates about becoming profitable;the percentage of royalties we expect to earn on Dacogen sales under ouragreement with MGI; our forecasts regarding our research and developmentexpenses; and our statements regarding the sufficiency of our cash to meet ouroperating needs. Our actual results could differ materially from thosepredicted in the forward-looking statements as a result of risks anduncertainties including, but not limited to, delays and risks associated withconducting and managing our clinical trials; developing products and obtainingregulatory approval; ability to establish and maintain collaborationrelationships; competition; ability to obtain funding; ability to protect ourintellectual property; our dependence on third party suppliers; risksassociated with the hiring and loss of key personnel; adverse changes in thespecific markets for our products; and our ability to launch and commercializeour products. Certain unknown or immaterial risks and uncertainties can alsoaffect our forward-looking statements. Consequently, no forward-lookingstatement can be guaranteed and you should not rely on these forward-lookingstatements. For a discussion of the known and material risks that couldaffect our actual results, please see the “Risk Factors” section of thisreport. We undertake no obligation to update any forward-looking statements,whether as a result of new information, future events or otherwise. Readersshould carefully review the Risk Factors section as well as other reports ordocuments we file from time to time with the Securities and ExchangeCommission.*

**Overview**

We are a pharmaceutical company dedicated to thediscovery, development and commercialization of therapies to treat patientswith cancer. In addition, we have a number of Aurora-A and Tyrosine Kinaseinhibitors and DNA methyltransferase pre-clinical products under development.In 2006, Dacogen received approval for marketing in the United States,Orathecin was withdrawn from the regulatory review process, Nipent and ourcommercial infrastructure was sold to Mayne Pharma, and we acquired a drugdiscovery and development company to complement our ongoing licensing efforts.These changes have been implemented to mitigate the ongoing risk of competitivein-licensing and maximize the return on both existing resources and ourincoming royalty and milestone revenue.

Since our incorporation in 1991 we have devotedsubstantially all of our resources to our product development efforts. Our pastdevelopment efforts have been focused on three key compounds:  Dacogen, Nipent, and Orathecin.

*Dacogen.**  *Our originalNDA for Dacogen was accepted for filing by the FDA on December 31, 2004.On September 1, 2005, we received an Approvable Letter for Dacogen fromthe FDA, which provided that Dacogen was approvable pending the FDA’s review ofadditional data. We completed the collection and analysis of the data requestedby the FDA and submitted our response to the Approvable Letter onNovember 15, 2005. On May 3, 2006, the FDA approved Dacogen for thetreatment of patients with MDS.

In September 2004, we executed an agreementgranting MGI exclusive worldwide rights to the development, manufacture,commercialization and distribution of Dacogen. Under the terms of theagreement, MGI made a $40.0 million equity investment in us and will pay up to$45.0 million in specific regulatory and commercialization milestones. To date,we have received $32.5 million of these milestones, including $20.0 millionupon first commercial sale of Dacogen in the U.S. in May 2006. In accordance with our agreement with MGI, weare entitled to receive a royalty on worldwide net sales starting at 20% andescalating to a maximum of 30%. During the year ended December 31, 2006,we recorded royalty revenue 

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of $3.4 million. Becausewe do not have sufficient ability to accurately estimate Dacogen sales, werecognize royalty revenue on a cash basis when we receive it from MGI.

In July 2006, MGI executed an agreement tosublicense Dacogen to Janssen-Cilag GmbH, a Johnson & Johnson company,granting exclusive development and commercialization rights in all territoriesoutside North America. In accordance with our license agreement with MGI, weare entitled to receive 50% of any payments MGI receives as a result of anysublicenses. We received $5.0 million, 50% of the $10 million upfront payment MGIreceived, and, as a result of both the original agreement with MGI and thissublicense with Cilag GmbH, may receive up to $23.75 million in futuremilestone payments as they are achieved for Dacogen globally. Janssen-Cilagcompanies will be responsible for conducting regulatory and commercialactivities related to Dacogen in all territories outside North America, whileMGI retains all commercialization rights and responsibility for all activitiesin the United States, Canada and Mexico.

*Nipent.**  *Nipent isapproved by the FDA and EMEA for the treatment of hairy cell leukemia. Nipentwas marketed by us in the United States until August 2006 and is currentlybeing distributed in Europe.

On June 1, 2006, we entered into an agreementwith Wyeth to terminate the European distribution of Nipent by Wyeth andtransition distribution to SuperGen. In connection with the execution of theamended agreement, we paid Wyeth $2.1 million in consideration for theacceleration of the transfer of the Nipent European distribution rights and thenet profit amounts to be paid by Wyeth as described below. The originaldistribution and supply agreement with Wyeth would have terminated on its ownterms at no cost to SuperGen over a period of time, varying by country, throughMarch 2007. Under the amended agreement, distribution rights transitionedfor most countries, except Spain and France, on December 1, 2006.

During the transition period, we shipped vials ofNipent to Wyeth for sale and distribution in various countries in Europe. On amonthly basis, Wyeth remitted to SuperGen an additional amount, defined in theamended and restated supply agreement as the “net profit,” based on Wyeth’ssales of Nipent. The net profit has been computed as Wyeth’s invoiced netsales, less the product acquisition cost from SuperGen, less 5% transfer fee(based on product cost) and less 5% distribution fee (based on net revenue).Recurring remittances to SuperGen may be adjusted by any Wyeth invoiced tradereceivable that is overdue by 60 days or more. Based on discussions with Wyeth,we believe that Wyeth’s ability to collect these amounts is reasonably assured.On December 1, 2006, we repurchased most of the unsold European inventoryheld by Wyeth with a shelf life greater than 12 months, with the exception ofvials packaged for Spain and France, which transitioned in early 2007.

On August 22, 2006, we closed a transaction withMayne Pharma (USA), Inc., whereby Mayne acquired the North American rightsto Nipent and SurfaceSafe cleaning system. Pursuant to the Asset AcquisitionAgreement, we received cash proceeds of $13.4 million upon closing of thetransaction. In addition to the initial payment and holdbacks, we had the rightto receive annual deferred payments totaling $14.1 million over the next fiveyears based on achievement of specific sales targets. These annual deferredpayments may be accelerated under certain circumstances, including a change ofcontrol at Mayne. Such a change of control occurred in February 2007 whenMayne was acquired by Hospira, and we received $10.3 million of the deferredpayments. We continued to maintain our commercial operations organization tosupport the sales and marketing of Nipent during the six-month transitionperiod, which ended on February 21, 2007. We have been reimbursed by Maynefor all Nipent sales and marketing costs during the transition period,including employee salaries and overhead.

On November 25, 2006, we entered into anotherAsset Acquisition Agreement with Mayne, pursuant to which Mayne will acquirethe remaining worldwide rights to Nipent from SuperGen for a totalconsideration of $8 million, including approximately $3.75 million upon theclosing of the transaction. The balance of the purchase price includes $1.25million of payments contingent on key events and the 

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remaining $3 million ispayable over a five-year period on the anniversary of the closing date. Thetransaction has been approved by both companies’ board of directors, and issubject to customary closing conditions and regulatory approval. Thistransaction is expected to close in the first quarter of 2007.

*Orathecin.**  *InJanuary 2004 we submitted an NDA under accelerated approval procedures tothe FDA for Orathecin for the treatment of pancreatic cancer patients that havefailed one or more therapies. Based on further discussions and feedback withboth the FDA and consultants, we determined the current package for Orathecinwas not sufficient to gain approval at this time in the United States and wewithdrew the NDA in January 2005. In July 2004, we submitted amarketing authorization to the European regulatory authorities seeking approvalof Orathecin. Based on extensive discussions with the European regulatoryauthorities, we withdrew the application in January 2006. An additionalPhase II clinical trial of Orathecin in combination with gemcitabine infirst-line patients with advanced pancreatic cancer was completed and interimresults were reported. The results of the trial were not robust enough toadvance this protocol to a Phase III study. We are currently exploring placingOrathecin and a few additional products into a new company that would raiseindependent capital to explore alternative development options.

*MontigenAcquisition.**  *In April 2006, we completed ouracquisition of Montigen, a privately-held oncology-focused drug discovery anddevelopment company headquartered in Salt Lake City, Utah. Montigen’s assetsinclude its research and development team, a proprietary drug discoverytechnology platform and optimization process, CLIMB, and late-stagepre-clinical compounds targeting Aurora-A Kinase and members of the TyrosineKinase receptor family. We expect one of the Montigen compounds to begin PhaseI clinical trials in 2007.

Pursuant to the terms of the agreement, we paid theMontigen stockholders a total of $17.9 million upon the closing of thetransaction in cash and shares of SuperGen common stock. We will pay theMontigen stockholders an additional $22.0 million in shares of SuperGen commonstock, contingent upon achievement of specific regulatory milestones.

To date, our product revenues have been limited andwere derived primarily from sales of Nipent for the treatment of hairy cellleukemia, which was marketed in the United States until August 2006 and isstill being sold in Europe. Most of our products are still in the developmentstage, and we will require substantial additional investments in research anddevelopment, clinical trials, regulatory and in sales and marketing activitiesto commercialize current and future product candidates. Conducting clinicaltrials is a lengthy, time-consuming, and expensive process involving inherentuncertainties and risks, and our studies may be insufficient to demonstrate safetyand efficacy to support FDA approval of any of our product candidates.

As a result of our substantial research anddevelopment expenditures and minimal product revenues, we have incurredcumulative losses of $365.3 million through December 31, 2006, and havenever generated enough funds through our operations to support our business. Weexpect to continue to incur operating losses at least through 2007.

Ultimately, our ability tobecome profitable will depend upon a variety of factors, including regulatoryapprovals of our products, the timing of the introduction and market acceptanceof our products and competing products, MGI’s success in commercializingDacogen, the launch of new products and our ability to control our ongoingcosts and operating expenses. If the results from our clinical trials are notpositive, we may not be able to get sufficient funding to continue our trialsor conduct new trials, and we would be forced to scale down or cease ourbusiness operations. Moreover, if our products are not approved or commerciallyaccepted we will remain unprofitable for longer than we currently anticipate.Additionally, we might be forced to substantially scale down our operations orsell certain of our assets, and it is likely the price of our stock woulddecline precipitously.

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**Critical AccountingPolicies**

Our management discussion and analysis of ourfinancial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and reporteddisclosures. On an on-going basis, we evaluate our estimates, including thoserelated to revenue recognition, intangible assets, valuation of investments andderivative instruments. We base our estimates on historical experience and onvarious other assumptions that we believe are reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates under differentassumptions or conditions.

Our significant accountingpolicies are more fully disclosed in Note 1 to our consolidated financialstatements. However, some of our accounting policies are particularly importantto the portrayal of our financial position and results of operations andrequire the application of significant judgment by our management. We believethe following critical accounting policies, among others, affect our moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements.

*Stock-Based Compensation*

On January 1, 2006, we adopted the fair valuerecognition provisions of Statement of Financial Accounting StandardsNo. 123(R),**“Share-Based Payment,” (“SFAS 123R”),using the modified-prospective-transition method. Under this transition method,compensation cost recognized for the year ended December 31, 2006includes: (a) compensation cost for all stock-based payments granted, butnot yet vested as of January 1, 2006, based on the grant-date fair value estimatedin accordance with the original provisions of Statement of Financial AccountingStandards No. 123, “Accountingfor Stock Based Compensation” (“SFAS 123”), and (b) compensationcost for all stock-based payments granted subsequent to January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof SFAS 123R. Such amounts have been reduced by our estimate of forfeitures ofall unvested awards. Results for prior periods have not been restated.

The fair value of each stock award is estimated on thegrant date using the Black-Scholes option-pricing model based on assumptionsfor volatility, risk-free interest rates, expected life of the option, anddividends (if any). Expected volatility is determined based on a blend ofhistorical volatility and implied volatility of our common stock based on theperiod of time corresponding to the expected life of the stock options. Theexpected life of our stock options is based on our historical data andrepresents the period of time that stock options granted are expected to beoutstanding. The risk-free interest rate is based on the U.S. Treasuryyield curve in effect at the time of grant commensurate with the expected lifeassumption.

We are using the straight-line attribution method torecognize stock based compensation expense. The amount of stock-basedcompensation recognized during a period is based on the value of the portion ofthe awards that are ultimately expected to vest. SFAS 123R requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. The term“forfeitures” is distinct from “cancellations” or “expirations” and representsonly the unvested portion of the surrendered option. We have applied an annualforfeiture rate of 12.02% to all unvested options as of December 31, 2006.This analysis will be re-evaluated quarterly and the forfeiture rate will beadjusted as necessary. Ultimately, the actual expense recognized over the vestingperiod will only be for those shares that vest.

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As of December 31,2006, there was $3,260,000 of total unrecognized compensation cost related tounvested stock-based awards. This cost is expected to be recognized over aweighted average period of 2.69 years. We expect approximately 932,000 inunvested options to vest at some point in the future. The number of optionsexpected to vest is calculated by applying an estimated forfeiture rate to theunvested options.

*Revenue Recognition*

Our net product revenues have related principally toNipent and, to a lesser extent, mitomycin. We recognize sales revenue uponshipment and related transfer of title to customers, and when collectibility isreasonably assured. Our gross product revenues are reduced by allowances forearly payment discounts, product returns, product exchanges, and chargebacks,which are described in more detail as follows:

*EarlyPayment Discounts**—The*reserve represents an estimatefor the portion of our accounts receivable trade customers that qualified forour early payment discounts program. For qualified customers we offered paymentterms of 2%-45, net 46 days. In prior years, the early payment discountstaken were not material and were recorded upon receipt of customer payments.Due to increasing levels of product revenue and continued utilization of theearly payment discounts program by our eligible accounts receivable tradecustomers during 2005, we determined the need to establish a reserve for theprogram to better match and record estimated early payment discounts that willbe taken with the corresponding product revenue. The reserve for early paymentdiscounts has been charged to product revenue. The reserve has been calculatedby (i) analyzing historical customer payment discount activity and trends,(ii) consideration of payments terms for any existing contractualcommitments, and (iii) other internal or external factors including(a) changes in buying patterns by customers and (b) changingconditions in the financial strength of our customers.

*ProductReturns**—*The reserverepresents an estimate for the portion of product revenue that may be returnedin the future for credit. Products can be returned for credit only underlimited circumstances such as expiring product returned under backorder orout-of-stock circumstances. The reserve for product returns has been charged toproduct revenue. The reserve has been calculated by (i) analyzinghistorical product return activity and trends, (ii) consideration ofproduct returns within the framework of any relevant contractual commitments,and (iii) other internal or external factors including (a) inventoryheld by wholesalers and distributors and the remaining shelf life of theirinventory, (b) our inability to continue supplying product to ourcustomers, and (c) independent product usage information. We continue toprocess credits for returns of expired product after our sale of the Nipentbusiness to Mayne in August 2006. The returns reserve includes amounts tocover the return of product that would otherwise have been exchanged, since weno longer have any inventory to use in exchange. The balance of the returnsreserve at December 31, 2006 exceeded our accounts receivable balance, andhas been reclassified to accounts payable and accrued liabilities.

*ProductExchanges**—The*reserve represented anestimate for the portion of product shipments that may be exchanged in thefuture. Product exchanges generally consisted of damaged product, shortagesexisting upon product receipt by the customer or product that is returnedwithin three months after product expiration. The cost for product exchangeshas been included in cost of product revenue. The reserve was calculated by(i) analyzing historical product exchange activity and trends,(ii) consideration of product exchanges within the framework of anyrelated contractual commitments, and (iii) other internal or externalfactors including (a) inventory held by wholesalers and distributors andthe remaining shelf life of their inventory, (b) changes in actual andanticipated sales based on our internal estimates and (c) any independentproduct usage information. Due to the sale of Nipent to Mayne inAugust 2006, we no longer had any inventory to provide in exchange. Therefore,the reserve for product exchanges was eliminated by December 31, 2006.Also see comment above relating to the returns reserve needed to cover productthat would have been provided in exchange.

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*Chargebacks**—The***reserve represented an estimate for the portion of productrevenue that was subject to our chargeback program. We marketed our productsprimarily to wholesalers and distributors. The wholesalers and distributorsthen sold to indirect customers, which included hospitals, clinics, governmentagencies, pharmacies, physician offices, managed care organizations, nursinghomes, pharmacy benefit management companies, and group purchasingorganizations. In addition to our existing chargeback programs which includedrebates and governmental transactions, we expanded our chargeback programduring 2004 and entered into agreements with certain indirect customers toestablish contract pricing for our primary product, Nipent. When the productwas purchased by a qualifying indirect customer from the wholesaler ordistributor a chargeback was generated. Chargebacks were the mechanism forreimbursing the wholesaler or distributor for the difference between our retailprice to the wholesaler or distributor and the indirect customer’s contractprice. There could be a time lag of one to six months between the original saleto the wholesaler or distributor and the subsequent sale to the indirectcustomer generating the chargeback. In previous years, chargebacks were chargedto revenue when issued. Nipent sales in the U.S. increased from $11.6 millionin 2004 to $15.1 million in 2005, broadening product revenue subject to ourexpanded chargeback program. Due to the increase in product revenue subject tothe expanded chargeback program, we determined the need to establish a reservefor chargebacks in order to better match and record our estimated financialexposure for chargebacks with the corresponding product revenue. The reservefor chargebacks has been charged to product revenue. The reserve was calculatedby (i) analyzing historical chargeback activity and trends,(ii) consideration of our obligations within the framework of existing,expiring and new contractual commitments, and (iii) other internal orexternal factors including (a) actual and anticipated purchasing trends byour wholesalers and distributors and qualifying indirect customers,(b) expectation and timing of product price increases and(c) anticipated changes in the industry, customer base or governmentregulation that may impact the use, structure or administration of chargebackprograms. Due to the sale of Nipent to Mayne in August 2006, allchargebacks originating after the date of the sale became the responsibility ofMayne. We processed all chargebacks that originated prior to the date of thesale and have no further chargeback liability. Therefore, the reserve forchargebacks was zero at December 31, 2006.

A rollforward of each component of ourreserve balances is noted below (in thousands):

| **Rollforward Activity**                  | ** ** | ** ** | ** ** | **Early  Payment  Discounts** | ** ** | **Product  Returns** | ** ** | **Product  Exchanges** | ** ** | **Chargebacks** | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------------------|------------|----------------------|------------|------------------------|------------|-----------------|------------|
| Balances at December 31, 2005             |       |       | $          | 120                           |       |                 |       | $                      | 150        |            |       |   | $ | 12 |   |   |   | $ | 500 |   |   |
| Provision  (credit) made in the current period |       |       | 203        |                          |       |                 | 705        |                   |       |            | (9         | ) |   |   | 944 |   |   |
| Actual returns or credits in current period    |       |       | (321       | )                             |       |                 | (549       | )                      |       |            | (3         | ) |   |   | (1,444 | ) |   |
| Balances at December 31, 2006             |       |       | $          | 2                             |       |                 |       | $                      | 306        |            |       |   | $ | — |   |   |   | $ | — |   |   |

 

Cash advance payments received in connection withdistribution agreements, license agreements, or research grants are generallydeferred and recognized ratably over the period of the respective agreements oruntil services are performed. We recognize cost reimbursement revenue undercollaborative agreements as the related research and development costs areincurred. We recognize milestone fees upon completion of specified milestonesaccording to contract terms. Deferred revenue represents the portion ofresearch payments received that has not been earned.

We have accounted for our $2.1 million payment toWyeth in June 2006 as Prepaid distribution and marketing rights, which isbeing amortized against revenue over 10 months, equaling the terminationacceleration period of June 2006 through March 2007.  The amortization of $1.47 million throughDecember 31, 2006 has been reflected as a reduction of product revenue.Proceeds from our initial product shipments to Wyeth have been deferred and havebeen recognized as revenue, along with the related cost of revenue, when theproduct was delivered to the end customer by Wyeth. Under the terms of our 

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amended license agreementwith Wyeth, we receive an additional amount of net profit based on Wyeth’ssales of Nipent. During the year ended December 31, 2006, we received $1.5million of net profit, which was included in net product revenue.

In accordance with our license agreement with MGI, wereceived a milestone payment and recorded milestone revenue of $20.0 million inthe year ended December 31, 2006. MGI is required to pay us royalties of20% to 30% of net Dacogen sales within 45 days after the end of each calendarquarter. During the year ended December 31, 2006, we recorded royaltyrevenue of $3.4 million. Because we do not have sufficient ability toaccurately estimate Dacogen sales, we recognize royalty revenue on a cash basiswhen we receive it from MGI. In accordance with our license agreement with MGI,we are entitled to receive 50% of any payments MGI receives as a result of anysublicenses. We received $5.0 million, 50% of the $10 million upfront paymentMGI received, and, as a result of both the original agreement with MGI and asublicense with Cilag GmbH, may receive up to $23.75 million in futuremilestone payments as they are achieved for Dacogen globally.

We received initial cashproceeds from the Asset Acquisition Agreement with Mayne Pharma of $13.4million. From the initial proceeds we have deducted the value of net assetsdelivered to Mayne, including inventory, prepaid expenses, and manufacturingequipment, as well as the costs related to the alternative supplyreimbursements and the gross margin on vials repurchased from Mayne for supply toEurope, and have computed a net remaining net gain of $11.8 million. However,due to the uncertainty regarding the price protection exposure noted in Note 7to our financial statements, we have deferred the entire net gain as ofDecember 31, 2006.

*In Process Researchand Development*

The value assigned toacquired in-process research and development represented the fair value ofMontigen’s incomplete research and development programs that had not yetreached technological feasibility and had no alternative future use as of theacquisition date. The value of the acquired in-process research and developmentwas determined by estimating the future net cash flows for two compoundsbetween 2006 and 2029 using a present value risk adjusted discount rate of 26%.This discount rate is a significant assumption and is based on our estimatedweighted average cost of capital adjusted upward for the risks associated withthe projects acquired. The projected cash flows from the acquired projects werebased on estimates of revenues and operating profits related to the projectsconsidering the stage of development of each potential product acquired, thetime and resources needed to complete the development and approval of eachproduct, the life of each potential commercialized product and associated risksincluding the inherent difficulties and uncertainties in developing a drugcompound, including obtaining FDA and other regulatory approvals, and risksrelated to the viability of and potential alternative treatments in any futuretarget markets. 

*Goodwill andIntangible Assets*

We have intangible assetsrelated to goodwill and other acquired intangibles such as acquired workforce,CLIMB process technology, trademarks, covenants not to compete, and customerlists. The determination of related estimated useful lives and whether or notthese assets are impaired involves significant judgment. Changes in strategyand/or market conditions could significantly impact these judgments and requireadjustments to recorded asset balances. We review intangible assets, as well asother long-lived assets, for impairment whenever events or circumstancesindicate that the carrying amount may not be fully recoverable. Additionally,we review goodwill for impairment annually in accordance with FASB StatementNo. 142, “Goodwill and Other Intangible Assets.”

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*Valuation ofInvestments in Financial Instruments*

Investments in financial instruments are carried atfair value with unrealized gains and losses included in Accumulated othercomprehensive income or loss in stockholders’ equity. Our investment portfolioincludes equity securities that could subject us to material market risk andcorporate obligations that subject us to varying levels of credit risk. If thefair value of a financial instrument has declined below its carrying value fora period in excess of six consecutive months or if the decline is due to asignificant adverse event, such that the carrying amount of these investmentsmay not be fully recoverable, the impairment is considered to be other thantemporary. An other than temporary decline in fair value of a financialinstrument would be subject to a write-down resulting in a charge againstearnings. The determination of whether a decline in fair value is other thantemporary requires significant judgment, and could have a material impact onour balance sheet and results of operations. Our management reviews thesecurities within our portfolio for other than temporary declines in value on aregular basis. The prices of some of our marketable securities, in particularAVI, are subject to considerable volatility. Decreases in the fair value ofthese securities may significantly impact our results of operations.

Investments in equitysecurities without readily determinable fair value are carried at cost. Weperiodically review those carried costs and evaluate whether an impairment hasoccurred. The determination of whether an impairment has occurred requiressignificant judgment, as each investment may have unique market or developmentopportunities.

*DerivativeInstruments*

In connection with ourJune 2003 convertible debt transaction, we issued to the note holderswarrants to purchase 2,634,211 shares of common stock of AVI at $5.00 pershare. In January 2006, 300,000 of these warrants were exercised, and theremaining warrants expired on December 31, 2006 unexercised. Thesewarrants were considered to be a derivative and were recorded on the balancesheet at estimated fair value. The accounting for derivatives is complex, andrequires significant judgments and estimates involved in determining theestimated fair value in the absence of quoted market values. These estimatesare based on valuation methodologies and assumptions deemed appropriate in thecircumstances. The estimated fair value of the warrants is based on variousassumptions input into the Black-Scholes pricing model. These assumptionsinclude the estimated market volatility and interest rates used in thedetermination of fair value. The use of different assumptions may have amaterial effect on the estimated fair value amount and the results ofoperations.

**Cumulative EffectAdjustment for UK Tax Liability Upon Adoption of SAB 108**

Duringthe third quarter of 2006 a previously unrecorded United Kingdom (“UK”) payrollrelated liability was identified. We estimated this liability aggregates$966,000, related to withholding and other personal income tax, penalties andinterest involving a former SuperGen employee who was a United States citizenand worked in the UK. The liability originated during the years 2002—2006 andwas identified as a result of disclosures made by a UK employee to ourauditors. We determined that $795,000 of the liability related to periods priorto 2006. The following table illustrates the amount of the error that originatedin each of the years between 2002 and 2005 (in thousands):

| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net loss, as  reported          |       | $                                          | (14,482    | ) | $ | (46,860 | ) | $ | (53,470 | ) | $ | (49,471 | ) |
| Amount of  understatement       |       | (181                                       | )          | (308 | ) | (205 | ) | (101 | ) |
| Error as a percent of  net loss |       | 1.2                                        | %          | 0.7 | % | 0.4 | % | 0.2 | % |
|                                 |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

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Weadopted the provisions of Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements”**(“SAB 108”).Prior to the adoption of SAB 108, we quantified misstatements based on theamount of the error originating in the current year statement of operations(“rollover approach”). SAB 108 requires that in addition to considering theamount of the error originating in the current year statement of operations,the misstatement existing at each balance sheet date should also be considered,irrespective of the period of origin of the error (“iron curtain approach”). Wedo not believe that any of the amounts included in the table above are materialto the periods in which they originated using the rollover approach. However,using the iron curtain method upon adoption of SAB 108, we have determined thatthe quantitative cumulative error aggregating approximately $795,000 thatexisted as of December 31, 2005 is material to the 2005 financialstatements. As permitted when first applying the guidance in SAB 108, priorperiods were not restated. The cumulative effect of the initial application ofSAB 108 for quantification and correction of the error is included in theaccumulated deficit as of December 31, 2006 in the accompanying balancesheet. The impact of this cumulative effect adjustment is an increase toaccrued payroll and employee benefits of $795,000 and an increase to accumulateddeficit of $795,000 as of January 1, 2006. The following table illustratesthe effect of the cumulative effect adjustment recorded as of January 1,2006 (in thousands):

| ** **                                            | ** ** | **Accrued payroll  and employee  benefits** | ** ** | **Accumulated  deficit** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------|------------|
| Balance as of  December 31, 2005, as reported    |       |                                                  | $          | 2,269                    |       |   |   | $ | (348,010 | ) |   |
| Cumulative effect  adjustment for adoption of SAB 108 |       |                                                  | 795        |                     |       |   | (795 | ) |   |
| Balance as of  January 1, 2006, as adjusted      |       |                                                  | $          | 3,064                    |       |   |   | $ | (348,805 | ) |   |

 

Of the $171,000 expensethat originated during 2006, $135,000 is included in selling, general andadministrative expense and $36,000 is included in the foreign currencytransaction adjustment for year ended December 31, 2006.

**Results ofOperations**

***Year endedDecember 31, 2006 compared with year ended December 31, 2005:***

| ** **                                | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Revenues**                              | ** ** | ** **                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| Net product  revenue                      |       | $                                    | 9,563      |       | $          | 16,059     |       | $ | (6,496 | ) | (40.5 | )% |
| Development and  license revenue          |       | 25,093                               |       | 13,353     |       | 11,740     |       | 87.9 |   |
| Royalty revenue                           |       | 3,427                                |       | —     |       | 3,427      |       | — |   |
| Distribution agreement  and other revenue |       | —                               |       | 757        |       | (757       | )          | (100.0 | ) |
|                                           |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |

 

The decrease in netproduct revenues in 2006 was due primarily to the sale of the U.S. Nipent andSurface Safe products to Mayne effective August 21, 2006. Net sales ofNipent were approximately $8.4 million in 2006, compared to $15.0 million in2005. Nipent sales in2006 included approximately $509,000 in sales to Europe, compared to $1.0million in 2005.

The increase indevelopment and license revenue relates to our license agreement entered intowith MGI in September 2004. Development and license revenue consisted of$20.0 million in milestone revenue relating to the approval of Dacogen by theFDA, and $5 million associated with the sublicense of Dacogen in all territoriesoutside North America from MGI to Janssen-Cilag. Development and license revenue for 2005included $9.9 million related to the amortization of deferred revenue inconnection with the upfront payment received from MGI, and $3.4 million relatedto reimbursement of Dacogen development and allocated overhead costs.

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The $3.4 million of royalty revenue we recognized in 2006reflects royalties from MGI’s Dacogen sales for the second and third quartersof 2006. Revenue is received and recorded 45 days after the end of eachquarter. Because we donot have sufficient ability to accurately estimate Dacogen sales, we recognizeroyalty revenue on a cash basis when we receive it from MGI.

Distribution agreement andother revenue for 2005 included $167,000 relating to the termination of ourNipent distribution agreement with Abbott Laboratories, and $590,000 relatingto the proceeds received from the transfer agreement with AmericanPharmaceutical Partners, Inc. whereby we transferred the ANDA and allrights, title, and interest in our generic daunorubicin. There were no similartransactions in 2006.

| ** **                                      | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Costs and operating expenses** | ** ** | ** **                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                      | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| Cost of product  revenue                        |       | $                                    | 2,003      |       | $          | 3,051      |       | $ | (1,048 | ) |   | (34.4 | )% |   |
| Research and  development                       |       | 16,544                               |       | 15,059     |       | 1,485      |       |   | 9.9 |   |   |
| Selling, general  and administrative            |       | 24,714                               |       | 28,046     |       | (3,332     | )          |   | (11.9 | ) |   |
| Acquired in-process  research and development   |       | 16,318                               |       | —     |       | 16,318     |       |   | — |   |   |
|                                                 |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

The decrease in cost of product revenue was dueprimarily to the sale of Nipent and Surface Safe products to Mayne Pharma. Thiswas offset by increased cost of product revenue for Mitomycin due to two failedmanufacturing batches.

The increase in research and development expenses wasdue to higher drug discovery research costs associated with the newly acquiredMontigen facility in Salt Lake City, Utah and employee stock compensation costsrecorded as a result of the implementation of SFAS 123R, offset by lowerclinical research and supply costs related to Orathecin of $921,000, Dacogen of$1.3 million, and Nipent of $772,000. We conduct research internally and alsothrough collaborations with third parties, and we intend to maintain our strongcommitment to our research and development efforts in the future. Our researchand development activities consist primarily of clinical development and therelated advancement of our existing product candidates through clinical trials.Conducting clinical trials is a lengthy, expensive and uncertain process.Completion of clinical trials may take several years or more. The length oftime generally varies substantially according to the type, complexity, noveltyand intended use of the product candidate. Our clinical trials may be suspendedat any time if we or the FDA believe the patients participating in our studiesare exposed to unacceptable health risks. We may encounter problems in ourstudies which will cause us or the FDA to delay or suspend the studies. Becauseof these uncertainties, we cannot predict when or whether we will successfullycomplete the development of our product candidates or the ultimate productdevelopment cost.

The decrease in selling, general and administrativeexpenses for 2006 relates primarily to lower costs associated with sales andmarketing programs due to the sale of Nipent and Surface Safe to Mayne inAugust 2006, offset by higher expenses relating to the recording of stockcompensation expense as a result of the implementation of SFAS 123R, and higherlegal and accounting consulting expenses.

Acquired in-process researchand development expense recorded in 2006 relates to the valuation of ouracquisition of Montigen in April 2006. The value assigned to acquiredin-process research and development represented the fair value of Montigen’sincomplete research and development programs that had not yet reachedtechnological feasibility and had no alternative future use as of theacquisition date. The value of the acquired in-process research and developmentwas determined by estimating the future net cash flows for two compoundsbetween 2006 and 2029 using a present value risk adjusted discount rate of 26%.This discount rate is a significant assumption and is based on our estimatedweighted average cost of capital adjusted upward for the risks associated withthe projects acquired. The projected cash flows from the acquired projects werebased on estimates of revenues and operating profits related to 

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theprojects considering the stage of development of each potential productacquired, the time and resources needed to complete the development andapproval of each product, the life of each potential commercialized product andassociated risks including the inherent difficulties and uncertainties indeveloping a drug compound, including obtaining FDA and other regulatory approvals,and risks related to the viability of and potential alternative treatments inany future target markets.

| ** **                                   | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Other income (expense)**         | ** ** | ** **                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                   | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| Interest income                              |       | $                                    | 2,746      |       | $          | 1,727      |       | $ | 1,019 |   | 59.0 | % |
| Gain on  disposition of investment in AVI    |       | 780                                  |       | —     |       | 780        |       | — |   |
| Foreign currency  transaction gain           |       | 241                                  |       | —     |       | 241        |       | — |   |
| Other than temporary  decline in investments |       | —                               |       | (11        | )          | 11         |       | (100.0 | ) |
| Change in valuation of  derivatives          |       | 1,817                                |       | (211       | )          | 2,028      |       | 961.1 |   |
|                                              |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |

 

The increase in interestincome is due to higher available cash balances due to $13.4 million proceedsfrom Mayne transaction, receipt of $25.0 million in milestone and sublicenserevenue from MGI, and the exercise of warrants of approximately $6.7 million inthe third quarter of 2006.

As part of ourJune 2003 convertible debt transaction, we issued to the note holderswarrants to purchase 2,634,211 shares of AVI at $5.00 per share. InJanuary 2006, one of the warrant holders exercised 300,000 warrants. Aspart of this transaction, we received $1.5 million in cash and transferred300,000 of the AVI Shares to the warrant holder. We recognized a gain ondisposition of the shares of $780,000, representing the difference between our$2.40 per share adjusted cost basis of the shares and the exercise price.

During2006, we recorded transaction gains on foreign currency exchange relating toactivities of our subsidiary EuroGen, reflecting increased activity at EuroGenthat began selling and distributing Nipent in 2006. Prior year transactiongains or losses were not material and were included in operating expenses.

The warrants issued in theJune 2003 convertible debt transaction represented a derivative instrumentand were revalued each quarter using the Black-Scholes pricing model. AtDecember 31, 2006, the warrants had expired and the value of thisderivative was zero.

***Year endedDecember 31, 2005 compared with year ended December 31, 2004:***

| ** **                                | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Revenues**                              | ** ** | ** **                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| Net product  revenue                      |       | $                                    | 16,059     |       | $          | 13,127     |       | $ | 2,932 |   |   | 22.3 | % |   |
| Development and  license revenue          |       | 13,353                               |       | 18,866     |       | (5,513     | )          |   | (29.2 | ) |   |
| Distribution agreement  and other revenue |       | 757                                  |       | —     |       | 757        |       |   | — |   |   |
|                                           |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

The increase in netproduct revenue for 2005 was due primarily to higher unit sales of Nipent. Netsales of Nipent were approximately $15.0 million in 2005, compared to $11.4million in 2004. Nipent sales in 2005 included approximately $1.0 million insales to Europe, compared to $1.5 million in 2004. Unlike our Nipent salesefforts in the U.S. market where we call on clinicians directly, our role inEurope has been limited to that of a supplier. As such, we have not had adirect influence on Nipent sales at the clinical level, making the timing andmagnitude of European sales difficult to predict and dependent on the effortsof our European distributor. During the first quarter of 2004, we acquired themarketing rights for Nipent in Europe, which allows us to charge a higher unitprice for Nipent in Europe compared to the unit prices charged under the previoussupply agreement.

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Development and licenserevenue relates to our license agreement entered into with MGI inSeptember 2004. Development and license revenue for 2005 included $9.9million related to the amortization of deferred revenue in connection with theupfront payment received from MGI, and $3.4 million related to reimbursement ofDacogen development and allocated overhead costs. In 2004, we recorded $2.7million related to the amortization of deferred revenue, $3.6 million relatedto the reimbursement of Dacogen development costs, and $12.5 million related toachievement of certain regulatory milestones.

Distribution agreement andother revenue for 2005 includes revenue from the termination of our Nipentdistribution agreement with Abbott Laboratories. Upon signing this agreement in1999, we received $5.0 million from Abbott, which was recorded as deferredrevenue and was being amortized over a five-year period. In February 2005,we paid Abbott $1.5 million to terminate this agreement, and this amount wascharged against the unamortized balance of deferred revenue of $1.7 million.The remaining $167,000 was recorded as distribution agreement revenue in thefirst quarter of 2005 as a result of the termination of the distributionagreement. The remaining $590,000 in revenue relates to the proceeds receivedfrom the transfer agreement with American Pharmaceutical Partners, Inc.whereby we transferred the ANDA and all rights, title, and interest in ourgeneric daunorubicin. There were no similar transactions in 2004.

| ** **                                      | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Costs and operating expenses** | ** ** | ** **                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                      | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| Cost of product revenue                         |       | $                                    | 3,051      |       | $          | 4,135      |       | $ | (1,084 | ) |   | (26.2 | )% |   |
| Research and development                        |       | 15,059                               |       | 23,978     |       | (8,919     | )          |   | (37.2 | ) |   |
| Selling, general and administrative             |       | 28,046                               |       | 28,800     |       | (754       | )          |   | (2.6 | ) |   |
|                                                 |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

Cost of product revenue asa percentage of net product revenue was 19% in 2005 compared to 32% in 2004.The decrease in 2005 is due to a variation in product mix, with a largerportion of our sales being related to domestic Nipent, which is sold at highermargins than mitomycin, and lower distribution costs for Nipent since weterminated our Nipent distribution agreement with Abbott in the first quarterof 2005. Current margins may not be indicative of future margins due topossible variations in product mix, average selling prices, and of futuremargins due to possible variations in product mix, average selling prices, andmanufacturing costs.

The decrease in researchand development expenses was due primarily to lower expenditures relating toour clinical studies of Orathecin, which declined by $3.2 million in 2005 over2004, and Dacogen, which declined by $1.9 million in 2005 over 2004. These arethe result of lower clinical study expenses and clinical supply costs forOrathecin and Dacogen, as those clinical studies have wound down after thecompletion of our FDA and European submissions for both drugs during the latterhalf of 2004. In addition, we had lower personnel costs in 2005 of $2.4 millionas a result of a reduction in headcount of approximately 16% in the firstquarter of 2005. Furthermore, the expenses for 2004 included a $500,000non-cash charge paid in shares of our common stock to the Stehlin Foundation asa milestone payment for the acceptance of the submission of the NDA forOrathecin.

We conduct researchinternally and also through collaborations with third parties, and we intend tomaintain our strong commitment to our research and development efforts in thefuture. Our research and development activities consist primarily of clinicaldevelopment and the related advancement of our existing product candidatesthrough clinical trials. Our major research and development projects haveincluded Orathecin, Dacogen, and studies for other indications of Nipent. Wehave focused much of our attention and resources on developing Orathecin, andfrom 1998 through 2005, we have spent approximately $71.5 million on theOrathecin program. From 2000 through 2005, we have spent approximately $12.7million on the development of and clinical studies related to Dacogen, and from1998 through 2005, we have spent approximately $17.0 million on PhaseI, II, and Phase IV programs related to 

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differentindications of Nipent. Conducting clinical trials is a lengthy, expensive anduncertain process. Completion of clinical trials may take several years ormore. The length of time generally varies substantially according to the type,complexity, novelty and intended use of the product candidate. Our clinical trialsmay be suspended at any time if we or the FDA believe the patientsparticipating in our studies are exposed to unacceptable health risks. We mayencounter problems in our studies which will cause us or the FDA to delay orsuspend the studies. Because of these uncertainties, we cannot predict when orwhether we will successfully complete the development of our product candidatesor the ultimate product development cost.

The decrease in selling,general and administrative expenses for 2005 relates primarily to reducedexpenditures for marketing programs, legal fees, and investor relationsactivities, offset by increased costs related to our Nipent commercializationscale-up efforts in our European operations.

| ** **                                           | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Other income (expense)**                 | ** ** | ** **                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| Interest income                                      |       | $                                    | 1,727      |       | $          | 624        |       | 1,103 |   | 176.8 | % |
| Interest expense                                     |       | —                               |       | (2,338     | )          | (2,338     | )          | (100.0 | ) |
| Amortization of deemed  discount on convertible debt |       | —                               |       | (12,657    | )          | (12,657    | )          | (100.0 | ) |
| Other than temporary  decline in investments         |       | (11                                  | )          | (7,851     | )          | (7,840     | )          | (99.9 | ) |
| Change in valuation of derivatives                   |       | (211                                 | )          | 282        |       | (493       | )          | (174.8 | ) |
|                                                      |            |                                      |            |            |            |            |            |  |  |  |  |  |  |

 

The increase in interestincome is due to higher available cash balances due to a private placement ofour common stock in March 2004 with net proceeds of $32.5 million and thestock purchase and license agreements with MGI in September 2004 with netproceeds of $36.8 million, and higher interest rates in 2005.

Wehad no interest expense and amortization of deemed discount on convertible debtin 2005 as our convertible notes from the February 2003 transaction werefully repaid in February 2004 and the notes from June 2004 wererepaid by December 2004, primarily through the issuance of common stock.

During2005, we recorded an other than temporary decline in the value of ourinvestment in the stock of Inflazyme Pharmaceuticals. During 2004, we recordedan other than temporary decline in the value of our investment of the stock ofAVI.

The change in derivativevaluation of $282,000 in 2004 represented the change in the valuation of twoderivatives. As part of the June 2003 convertible debt transaction, weissued to the note holders warrants to purchase 2,634,211 shares of AVI at$5.00 per share. These warrants represent a derivative instrument and arevalued each quarter using the Black-Scholes pricing model. During 2004, thevalue of this derivative had decreased by $3.9 million, which was recorded asother income. We also recorded an expense of $3.6 million related to the derivativeaccounting treatment of initially unregistered warrants issued in connectionwith the private placement of shares of our common stock completed inMarch 2004, in accordance with EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock.” In 2005, we recorded a change in value of the derivativeassociated with the warrants to purchase the AVI shares of $211,000.

**Liquidity and Capital Resources**

Our cash, cashequivalents, and marketable securities totaled $67.9 million atDecember 31, 2006, compared to $47.8 million at December 31,2005. In addition, we held 2,384,211 shares of registered stock of AVI, most ofwhich were held as security for the warrants we issued to convertible debtholders to purchase 2,334,211 AVI shares at $5.00 per share. The AVI shares hada market value of $7.6 million at December 31, 2006, and are classified onthe balance sheet under non-current Investment in stock of related parties andRestricted cash and investments. The warrants to purchase the AVI shares at$5.00 per 

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shareexpired on December 31, 2006, and the AVI shares held as security becameunrestricted as of January 1, 2007.

Net cash provided by operating activities was $7.2million in 2006, and consisted primarily of the net loss of $16.5 million,change in valuation of derivatives of $1.8 million, cash payment of $2.1million to Wyeth to acquire European distribution rights, offset byamortization of intangibles and distribution and marketing rights of $2.1 million,non-cash stock compensation expense of $3.4 million, acquired in-processresearch and development of $16.3 million relating to the acquisition ofMontigen, decrease in accounts receivable of $4.1 million due to the sale ofNipent and Surface Safe to Mayne, and an increase in accounts payable and otherliabilities of $1.1 million. Our increase in cash reflects $25.0 million inmilestone payments received from MGI. Net cash used in operating activities was$11.7 million in 2005, and consisted primarily of the net loss of $14.5million, amortization of deferred revenue of $9.9 million from the MGI licenseagreement, payment of $1.5 million to Abbott terminating our Nipentdistribution agreement, and a $1.1 million reduction in accounts payable andother liabilities primarily due to lower research and development relatedactivities as discussed above, offset by decreases in accounts receivable of$11.6 million, due primarily to the receipt of $12.5 million in milestonerelated payments from MGI in 2005, and inventories of $1.9 million. The netcash used in operating activities in 2004 was $24.5 million, which consistedprimarily of the net loss of $46.9 million, plus $2.7 million in amortizationof deferred revenue and an increase of accounts receivable of $17.2 million,less depreciation of $1.1 million, amortization of prepaid financing costs of$1.8 million, amortization of deemed discount on convertible debt of $12.7million, an other than temporary decline in the value of investments of $7.9million, and increases in prepaid expenses of $1.0 million, accounts payable of$1.1 million, and deferred revenue of $13.1 million.

Net cash provided by investing activities in 2006 was$5.3 million, and consisted primarily of $1.5 million in proceeds from the saleof marketable securities and $13.4 million received from Mayne for the sale ofthe Nipent and Surface Safe product lines, offset by $0.9 million relating topurchases of property and equipment and $8.7 million relating to theacquisition of Montigen. Net cash provided by investing activities was $18.8million in 2005, and consisted of $29.8 million in proceeds from the sale ormaturities of marketable securities offset by $11.6 million in purchases ofmarketable securities. Net cash provided by investing activities was $131,000in 2004, which consisted primarily of $28.3 million in proceeds from the salesor maturities of marketable securities and $10.7 million cash released from thecollateral account, less $37.6 million used in the purchases of marketablesecurities and $1.0 million for the purchase of intangible assets.

Net cash provided by financing activities in 2006 was$7.5 million and consisted of proceeds from the issuance of common stock uponexercise of stock options and warrants. Net cash provided by financingactivities in 2005 was $2.2 million and consisted of proceeds from the issuanceof common stock upon exercise of stock options and warrants. Net cash providedby financing activities was $57.7 million in 2004, which consisted primarily ofproceeds from the issuance of common stock in a private placement, net ofissuance costs, and stock issued to MGI upon the sale of Dacogen.

Ourcontractual obligations as of December 31, 2006 are as follows (inthousands):

| ** **                                                            | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                            | ** ** | **Total**                                 | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Operating leases, net                                                 |       | $                                         | 9,084      |   |   | $ | 2,266 |   |   |   | $ | 6,818 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Long term  obligations—contractually  obligated research funding |       | 100                                       |       |   | 100 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total contractual cash obligations                                    |       | $                                         | 9,184      |   |   | $ | 2,366 |   |   |   | $ | 6,818 |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

The contractuallyobligated research funding noted above consists primarily of required paymentsto Skye Pharma. We are also obligated to potentially spend up to$80.0 million in milestone and development related payments to AVI fordevelopment of Avicine. We are unable to determine precisely when and if 

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ourpayment obligations under our agreement with AVI will become due as theseobligations are based on milestone events the achievement of which is subjectto a significant number of risks and uncertainties. Because some of themilestone events are revenue-related and payment obligation would not betriggered absent our receipt of revenues from the relationship, we may be ableto use funds generated from these relationships to make the milestone payments.

We have financed ouroperations primarily through the issuance of equity and debt securities and thereceipt of milestone payments in connection with collaborative agreements. Webelieve that our current cash, cash equivalents, marketable securities andother investments will satisfy our cash requirements through at leastDecember 31, 2007. We may pursue additional financing options, includingthe selling of additional shares of stock in public or private offerings.

We believe that our needfor additional funding will increase in the future, especially if we acquirenew product technologies for development and sale, and our ability to continueraising funds from external sources will be critical to our success. We continueto actively consider future contractual arrangements that would requiresignificant financial commitments. If we experience currently unanticipatedcash requirements, we could require additional capital much sooner thanpresently anticipated. We may raise money by the sale of our equity securitiesor debt, or the exercise of outstanding warrants and stock options by theholders of such warrants or options. However, given uncertain market conditionsand the volatility of our stock price, we may not be able to sell oursecurities in public offerings or private placements at prices and on termsthat are favorable to us, if at all. We may also choose to obtain fundingthrough licensing and other contractual agreements. Such arrangements mayrequire us to relinquish our rights to our technologies, products or marketingterritories, or to grant licenses on terms that are not favorable to us. If wefail to obtain adequate funding in a timely manner, or at all, we will beforced to scale back our product development activities, or our operations in amanner that will ensure we can discharge our obligations as they come due inthe ordinary course of business at least through December 31, 2007.

**Related Party Transactions**

*EuroGen Pharmaceuticals Ltd.*

In September 2001, weentered into a Supply and Distribution Agreement with EuroGen, a companyincorporated and registered in England and Wales. Under the agreement, wegranted EuroGen the exclusive European and South African rights to promote andsell certain of our existing generic and other products or compounds. Theagreement also establishes a process for granting EuroGen rights to selladditional products in Europe and South Africa, subject to our compliance withour other existing licensing and distribution arrangements. After complyingwith these existing obligations, we will be required to offer EuroGen theoption to obtain European and South African rights to our future products.EuroGen will seek and pay for all necessary regulatory approvals andauthorizations necessary for the commercial sale of the products in theterritories where they market and sell the products. In December 2002, webecame 95% owners of EuroGen. The remaining 5% is owned by the former Presidentand CEO of EuroGen. The results of EuroGen are included in our consolidatedoperations.

*KineMed, Inc.*

In November 2001, wemade an equity investment of $150,000 to acquire 100,000 shares ofSeries A Convertible Preferred stock of KineMed, Inc. (“KineMed”), astart-up biotech company. In March 2003, we made an additional equityinvestment of $30,000 to acquire an additional 15,000 shares. The president andchief executive officer of KineMed is a former director of SuperGen. Ourcurrent president and chief executive officer is a member of the board of directorsof KineMed. We accounted for this investment under the cost method as ourownership was less than 20% of KineMed’s outstanding shares. During 2005, wedetermined that the value of this investment was impaired due to the uncertainviability of KineMed as a going concern. As a result, the entire cost of theinvestment of $180,000 was charged to Selling, general, and administrativeexpense in 2005.

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In late 2004, we reachedan agreement with KineMed whereby we granted them exclusive worldwide rights tothe development, manufacture, commercialization and distribution of proprietaryproperty we own relating to etiocholoandeione and etiocholanolone compounds.Under the terms of the license agreement and upon successful commercialization,we could earn future royalty revenue on worldwide sales. In addition, we havetermination rights and rights of first refusal on new oncological uses.

*AVIBioPharma, Inc.*

In December 1999, we entered into an agreementwith AVI BioPharma, Inc. At the time, the chief executive officer of AVIwas a member of our board of directors. He later resigned from our board inMay 2002. The former president and chief executive officer of SuperGen wasa member of the board of directors of AVI through March 2004. Under theterms of the agreement, we acquired one million shares of AVI common stock,which amounted to approximately 7.5% of AVI’s outstanding common stock, for$2.5 million cash and 100,000 shares of our common stock at $28.25 per share.We also acquired exclusive negotiating rights for the United States market forAvicine, AVI’s proprietary cancer vaccine that was in late-stage clinicaltesting against a variety of solid tumors. Avicineis a non-toxic immunotherapy that neutralizes the effect of a tumor-associatedantigen on cancer cells, while stimulating the body’s immune system to reactagainst the foreign tumor.

In July 2000, we finalized an agreement with AVIto obtain the U.S. marketing rights for Avicine. We issued 347,826 shares ofour common stock along with $5 million in cash to AVI as payment for ourinvestment, in exchange for 1,684,211 shares of AVI common stock. As part ofthis agreement, we obtained the right of first discussion to all of AVI’soncology compounds and an option to acquire an additional 10% of AVI’s commonstock for $35.625 per share. This option is exercisable for a three-year periodcommencing on the earlier of the date the FDA accepts the NDA submitted forAvicine or the date on which the closing price of AVI’s common stock exceedsthe option exercise price. We have accounted for the investment in AVI underthe cost method as our ownership is less than 20% of AVI’s outstanding shares andis classified as available-for-sale. No value has been ascribed to the optionas neither of the measurements have been achieved as of December 31, 2006.

Avicine will requiresignificant additional expenditures to complete the clinical developmentnecessary to gain marketing approval from the FDA and equivalent foreignregulatory agencies. As part of this agreement, we are obligated to makeadditional payments to AVI based on successful achievement of developmental,regulatory approval, and commercialization milestones over the next severalyears that could total $80 million. In 2003 and 2002, we recorded $144,000 and$421,000, respectively, in research and development expenses for Avicine. AtDecember 31, 2006 and 2005, the sum of these expenses, or $565,000, wasstill payable and is presented on the balance sheet as Payable to AVIBioPharma, Inc.

*QuarkBiotech, Inc.*

Our current president andchief executive officer is a former director and our former president and chiefexecutive officer is currently a director and both are stockholders of QuarkBiotech, Inc. (“QBI”), a privately-held development stage biotechnologycompany. In June 1997, we made an equity investment of $500,000 in QBI’spreferred stock, which represents less than 1% of the company’s outstandingshares as of December 31, 2001. Our investment in QBI is carried at costand is included in “Investment in stock of related parties.”

*Other*

At December 31, 2006,we owned 10% of a privately-held company performing research anddevelopment work almost exclusively for SuperGen as well as selling SuperGencertain research supplies. The president of this company and our formerpresident and chief executive officer and board member 

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through2004 are currently partners in a new business enterprise. We paid this company$150,000 in 2004 for services and supplies. There were no payments to thiscompany in 2005 or 2006. We carry ourinvestment in this company at no value.

**Recently IssuedAccounting Standards**

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation ofStatement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes.” FIN 48 prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in an enterprise’s tax return. Thisinterpretation also provides guidance on the derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition of tax positions. The recognition threshold and measurementattribute is part of a two step tax position evaluation process prescribed inFIN 48. FIN 48 is effective after the beginning of an entity’s first fiscalyear that begins after December 15, 2006. We are currently evaluating theimpact of FIN 48 to our consolidated financial statements.

In September 2006,the FASB issued Statement of Financial Accounting Standards (“SFAS”)No. 157, Fair Value Measurements. SFAS No. 157 defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements. This statement clarifies how to measure fair value aspermitted under other accounting pronouncements but does not require any newfair value measurements. However, for some entities, the application of thisstatement will change current practice. We will be required to adopt SFASNo. 157 as of January 1, 2008. We are currently evaluating the impactof SFAS No. 157 and have not yet determined the effect on our earnings orfinancial position.

**Income Taxes**

Although we recorded a netloss for accounting purposes during 2006, we had taxable income and recorded afederal and state tax provision of $575,000, primarily due to book/taxdifferences relating to the write-off of in process research and development of$16.3 million, the expiration of the warrants to issue shares of AVI initiallyvalued at $10.1 million, and $3.4 million of stock compensation expense, offsetby the application of net operating loss carryforwards. As of December 31,2006, we have net operating loss carryforwards for federal income tax purposesof approximately $289 million which expire in the years 2011 through 2026, and federalresearch and development credit carryforwards of approximately $8 million,which expire in the years 2008 through 2026.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

*Interest Rate Risk*

Due to the short-term nature of our interest bearingassets, which consist primarily of certificates of deposit, United Statescorporate obligations, and United States government obligations, we believethat our exposure to interest rate market risk would not significantly affectour operations.

Our investment policy isto manage our marketable securities portfolio to preserve principal andliquidity while maximizing the return on the investment portfolio. Ourmarketable securities portfolio is primarily invested in corporate debtsecurities with an average maturity of under one year and a minimum investmentgrade rating of A or A-1 or better to minimize credit risk. Althoughchanges in interest rates may affect the fair value of the marketablesecurities portfolio and cause unrealized gains or losses, such gains or losseswould not be realized unless the investments were to be sold prior to maturity.

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*Warrants ConsideredDerivatives*

As part of ourJune 2003 convertible debt transaction, we issued to the note holderswarrants to purchase 2,634,211 shares of common stock of AVI at $5.00 pershare. These warrants were considered a derivative and were valued on thebalance sheet at $10.1 million using the Black-Scholes method onJune 24, 2003. As of December 31, 2005, the value of the derivativewas $1.8 million, but the value was zero at December 31, 2006 because thewarrants had expired on that date.

*Foreign CurrencyRisk*

We currently sell ourproduct primarily in Europe. Accordingly, we are subject to exposure fromadverse movements in foreign currency exchange rates. To date, the effect ofchanges in foreign currency exchange rates on revenue and operating expenseshas not been material. Operating expenses incurred by our foreign subsidiariesare denominated primarily in local currencies. We currently do not usefinancial instruments to hedge these operating expenses. We will assess ourneed to utilize financial instruments to hedge currency exposures on an ongoingbasis.

**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.**

All information requiredby this item is included on pages F-1 to F-31 in Item 15of Part IV of this Report and is incorporated into this item by reference.

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

None.

**ITEM9A. CONTROLS AND PROCEDURES.**

**Evaluation ofDisclosure Controls and Procedures.**

Based on their evaluationas of December 31, 2006, our chief executive officer and chief financialofficer have concluded that due to the material weakness discussed below ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended) were not effective toensure the information required to be disclosed by us in reports that we fileor submit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.

**Management’s Reporton Internal Control over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervisionand with the participation of our management, including our chief executiveofficer and chief financial officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting as of December31, 2006. In making this assessment, our management used the criteria set forthby the Committee of Sponsoring Organizations of the Treadway Commission in InternalControl-Integrated Framework (“the COSO Framework”).

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of our annual or interim financialstatements will not be prevented or detected. Our management’s assessment ofour internal control over financial reporting performed during the preparationof our consolidated financial statements as of December 31, 2006 identified thefollowing material weakness (as defined by the Public Company Accounting OversightBoard) in our internal control over financial reporting:

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The Company has determined that a material weaknessexists in the Company’s ability to maintain effective internal controls overthe application of generally accepted accounting principles (“GAAP”) to non-routineand complex transactions due to insufficient GAAP expertise commensurate withthe Company’s financial reporting requirements. As a result of this materialweakness, errors were identified during the audit process in the following twoareas. First, in connection with its periodic assessment of goodwill forimpairment the Company inappropriately evaluated goodwill for impairment belowthe reporting unit level. Second, the Company did not determine whether thecomputations in the reports used to record compensation cost for share basedpayments appropriately applied the estimated forfeiture rate such thatcompensation cost recognized for the year ended December 31, 2006 was at leastequal to the portion of the grant-date value of the awards that were vested atthat date. As a result, adjustments to correct the identified errors wererecorded in the consolidated financial statements for the year ended December31, 2006 related to goodwill, additional paid in capital, and costs andoperating expenses. 

Accordingly, management has determined that, becauseof this material weakness, the Company did not maintain effective internalcontrol over financial reporting as of December 31, 2006 based on the criteriaspecified in the COSO Framework. 

Management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited by Ernst & Young LLP, anindependent registered public accounting firm, as stated in their report.

| Dated: March 16, 2007 |   | By:        | /s/ JAMES  S.J. MANUSO                |
|-----------------------|--------|------------|---------------------------------------|
|                  |   | Name:      | James S.J. Manuso                     |
|                  |   | Title:     | President and Chief Executive Officer |
| ** **            |   | ** ** | (Principal  Executive Officer)        |
|                  |   | By:        | /s/ MICHAEL  MOLKENTIN                |
|                  |   | Name:      | Michael Molkentin                     |
|                  |   | Title:     | Chief Financial Officer               |
|                  |   |       | (Principal  Financial Officer)        |

 

**Remediation EffortsRelated to Material Weakness in Internal Control Over Financial Reporting**

In response to thematerial weakness in internal controls described above, we plan to improve ourability to maintain effective internal controls over the application of GAAP tonon-routine and complex transactions to meet our financial reportingrequirements. Specific measures we plan to adopt include:

·       Assessingand enhancing the experience and knowledge of personnel used in applying GAAPand determining when it is appropriate to consult with third party specialistson non-routine and complex accounting transactions.

·       Providing additionaltraining to all personnel in the application of GAAP to reduce the likelihoodof a material misstatement of our annual or interim financial statements.

**Remediation of PriorMaterial Weakness**

Management’s assessment of our internal control overfinancial reporting performed during the preparation of our condensed consolidatedfinancial statements for the period ending September 30, 2006 identified thefollowing material weakness in our internal control over financial reporting:

It was determined that a material weakness existed inthe Company’s system of internal control over financial reporting related tothe monitoring of our foreign locations’ process for identifying and timelyaddressing potential tax compliance issues that may result in a financialstatement impact. In October 

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2006, an adjustment wasidentified for an unpaid payroll and national insurance tax obligation,including estimated interest and penalties, related to our 95% owned UKsubsidiary, EuroGen Pharmaceuticals Ltd. The adjustment was identified as aresult of disclosures made by a UK employee to our auditors. The adjustmentemanated from work performed in the UK by a U.S. employee, who was Presidentand CEO of EuroGen. This employee’s work in the UK triggered UK residencyrequirements over a number of years from 2002 through 2006 by exceedingpermissible thresholds and subjecting the employee and EuroGen to certainpayroll and national insurance tax obligations. The employee resigned fromSuperGen during 2006. There have not been nor are there currently any otherU.S. national employees of the Company working in the UK.

Subsequent to September30, 2006, in response to the material weakness in internal controls describedabove, we took measures and established additional policies and procedures tomonitor our European locations to evaluate and determine that similarobligations are properly identified, communicated and recorded. These measuresincluded expanding oversight of our European operations impacting cash, legal,human resources, and regulatory activities; augmenting the staff in Europe tooversee business operations; and re-issued the Company’s Code of BusinessConduct and Ethics to all U.S. and UK employees. Based on the measures takenand implemented, management has determined that our system of internal controlsover financial reporting related to the monitoring of EuroGen and itssubsidiaries for identifying and timely addressing potential tax complianceissues that may result in a financial statement impact have been successfullyremediated as of December 31, 2006.

**Changes in InternalControl over Financial Reporting**

Except as discussed above in this Item 9A under“Remediation of Material Weakness in Internal Control Over Financial Reporting,”there have been no changes in our internal control over financial reportingthat occurred during the period covered by this report on Form 10-K that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and StockholdersSuperGen, Inc. 

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that SuperGen, Inc. did not maintain effective internal control overfinancial reporting as of December 31, 2006, because of the effect of thematerial weakness identified in management’s assessment and described below,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (theCOSO criteria). SuperGen, Inc.’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit. 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances We believe that our audit provides areasonable basis for our opinion. 

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements. 

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

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment as of December 31,2006. The Company has determinedthat a material weakness exists in the Company’s ability to maintain effectiveinternal controls over the application of generally accepted accountingprinciples (“GAAP”) to non-routine and complex transactions due to insufficientGAAP expertise commensurate with the Company’s financial reportingrequirements. As a result of this material weakness, errors were identifiedduring the audit process in the following two areas. First, in connection withits periodic assessment of goodwill for impairment the Company inappropriatelyevaluated goodwill for impairment below the reporting unit level.Second, the Company did not determine whetherthe computations in the reports used to record compensation cost for sharebased payments appropriately applied the estimated forfeiture rate such thatcompensation cost recognized for the year ended December 31, 2006 was at leastequal to the portion of the grant-date value of the awards that were 

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vestedat that date. As a result, adjustments to correct the identified errors wererecorded in the consolidated financial statements for the year ended December31, 2006 related to goodwill, additional paid in capital, and costs andoperating expenses. 

This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the 2006consolidated financial statements, and this report does not affect our reportdated March 15, 2007 on those financial statements.

In ouropinion, management’s assessment that SuperGen, Inc. did not maintain effectiveinternal control over financial reporting as of December 31, 2006, is fairlystated, in all material respects, based on the COSO criteria. Also, in ouropinion, because of theeffect of the material weakness described above on the achievement of theobjectives of the control criteria, SuperGen, Inc. has not maintained effectiveinternal control over financial reporting as of December 31, 2006, based on theCOSO control criteria. 
|                        | /s/ Ernst & Young  LLP |
|------------------------|---------------------------------|
| Palo Alto,  California |                            |
| March 15,  2007   |                            |

 

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**ITEM 9B. OTHERINFORMATION.**

**None**

**PART III**

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

Information regarding our Board of Directors isincorporated by reference to the section entitled “Election of Directors”appearing in our definitive Proxy Statement for the 2007 Annual Meeting ofStockholders to be filed with the Commission within 120 days after the end ofour year pursuant to Regulation 14A (the “Proxy Statement”).

The names of our executiveofficers and their ages, titles and biographies as of March 7, 2007 areset forth below.

**Executive Officers**

| **Name**                   | ** ** | ** ** | ** ** | **Age**                                          | ** ** | **Position** | ** ** | ** ** |
|----------------------------|------------|------------|------------|--------------------------------------------------|------------|--------------|------------|------------|
| James S. J. Manuso,  Ph.D. |       | 58         |       | President, Chief  Executive Officer and Director |
| Audrey Jakubowski, Ph.D.   |       | 64         |       | Chief Regulatory and  Quality Officer            |
| Michael Molkentin          |       | 52         |       | Chief Financial Officer                          |

 

*JamesS.J. Manuso, Ph.D.,* has served as our president andchief executive officer since January 1, 2004, as our chief executiveofficer-elect from September 2003 to December 2003 and as adirector since February 2001. Dr. Manuso is co-founder and immediatepast president and chief executive officer of GalenicaPharmaceuticals, Inc. Dr. Manuso co-founded and was general partnerof PrimeTech Partners, a biotechnology venture management partnership, from1998 to 2002, and Managing General Partner of The Channel Group LLC, aninternational life sciences corporate advisory firm. He was also president ofManuso, Alexander & Associates, Inc., management consultants andfinancial advisors to pharmaceutical and biotechnology companies.Dr. Manuso was a vice president and Director of Health Care Planning andDevelopment for The Equitable Companies (now Group Axa), where he also servedas Acting Medical Director. He currently serves on the board of privately-held KineMed, Inc.and Merrion Pharmaceuticals Ltd. (Dublin, Ireland). Previously, he served onthe boards of Inflazyme Pharmaceuticals, Inc., Symbiontics, Inc.,Quark Biotech, Inc., Galenica Pharmaceuticals, Inc., and SupratekPharma, Inc. Dr. Manuso earned a B.A. with Honors in Economics andChemistry from New York University, a Ph.D. in Experimental Psychophysiologyfrom the Graduate Faculty of The New School University, a Certificate in HealthSystems Management from Harvard Business School, and an Executive M.B.A. fromColumbia Business School. Dr. Manuso is the author of over 30 chapters,articles and books on topics including health care cost containment andbiotechnology company management. He has taught and lectured at Columbia, NewYork University, Georgetown, Polytechnic University, and Waseda University(Japan). He has delivered invited addresses at meetings of the AmericanManagement Association, the American Medical Association, the SecuritiesIndustry Association, the Biotechnology Industry Organization, and many otherprofessional associations. Dr Manuso is also a member of the Board of Trusteesof the Greater San Francisco Bay Area Leukemia & Lymphoma Society.

*AudreyJakubowski, Ph.D.,* joined us as vice president,regulatory affairs in August 1998 and served in that capacity untilOctober 2003 when she became senior vice president, regulatory affairs. InJanuary 2004, she was also given responsibility for quality assurance andwas named chief regulatory and quality officer. Prior to joining us,Dr. Jakubowski was vice president, regulatory affairs and quality atSystemix, Inc. from June 1996 to July 1998. FromOctober 1989 through June 1996, Dr. Jakubowski was executivedirector and then vice president of worldwide regulatory affairs for The DuPontMerck Pharmaceutical Company. From November 1979 throughOctober 1989, Dr. Jakubowski was first director 

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of regulatory affairs,dermatology products at Westwood Pharmaceuticals, followed by director ofinternational regulatory affairs, R&D products for Bristol Myers’ researchand development division. Prior to that, Dr. Jakubowski completedpost-doctoral fellowships in molecular biology at the Roswell Park MemorialInstitute and clinical endocrinology at Buffalo Children’s Hospital.Dr. Jakubowski received her Ph.D. in physical chemistry at SUNY Buffaloand her B.A. at Seton Hill College.

*MichaelMolkentin* joined us as chief financial officer andcorporate secretary in October 2003. Prior to joining us,Mr. Molkentin served as interim chief financial officer at AradigmCorporation from May 2000 to September 2002. From January 1995to April 2000, Mr. Molkentin served as division controller for ThermoFinnigan Corporation, a subsidiary of Thermo Electron. Mr. Molkentinserved in a variety of financial management positions with technologycompanies, including field controller of Vanstar Corporation, controller ofRepublic Telcom Systems, Inc. and corporate controller of ComputerAutomation, Inc. Mr. Molkentin is a CPA and received a B.B.A. inaccounting from Bernard M. Baruch College in New York City, New York.

*Edward Jacobs***served as chiefoperating officer during 2006. He left the Company on December 31, 2006.

**Audit CommitteeFinancial Expert**

Information regarding thefinancial expert(s) on the Audit Committee is incorporated by reference tothe Proxy Statement.

**Audit Committee**

Information regarding theAudit Committee is incorporated by reference to the Proxy Statement.

**Code of Ethics**

Information regarding theCode of Ethics is incorporated by reference to the Proxy Statement.

**CorporateGovernance**

Information regardingCorporate Governance is incorporated by reference to the Proxy Statement.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Information regardingSection 16(a) beneficial ownership reporting compliance is set forthunder “Voting Securities of Principal Stockholders and Management” in the ProxyStatement, which information is incorporated herein by reference.

**ITEM 11. EXECUTIVECOMPENSATION.**

Information regardingexecutive compensation is incorporated by reference to the information setforth under the caption “Compensation of Directors and Executive Officers,”including Compensation Committee Interlocks and Insider Participation, in theProxy Statement. The information included under the heading “CompensationCommittee Report” in the Proxy Statement is incorporated herein by reference;however, this information shall not be deemed to be “soliciting material” or tobe “filed” with the Commission or subject to Regulation 14A or 14C, or to theliabilities of Section 18 of the Exchange Act.

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

Information regardingsecurity ownership of certain beneficial owners and management is incorporatedby reference to the information set forth under the caption “Voting Securitiesof Principal Stockholders and Management” in the Proxy Statement. Informationregarding our Equity Compensation Plans is incorporated by reference in theProxy Statement.

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE.**

Information regardingcertain relationships and related transactions is incorporated by reference tothe information set forth under the caption “Certain Transactions” in the ProxyStatement. Certain of our relationships and related transactions are addressedin the “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” section of this report. The information regarding directorindependence is incorporated herein by reference to the Proxy Statement.

**ITEM 14. PRINCIPALACCOUNTING FEES AND SERVICES.**

Information regarding principal auditor fees andservices is set forth under “Principal Accounting Fees and Services” in theProxy Statement, which information is incorporated herein by reference.

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**PART IV**

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

(a)   Thefollowing documents are filed as part of this report:

1.     *All Financial Statements:*

The following financial statements and the Reportsof Ernst & Young LLP, Independent Registered Public Accounting Firm,are included in Part IV of this Report on the pages indicated:

|                                                                 | ** ** | Page |
|-----------------------------------------------------------------|------------|------|
| Reports  of Independent Registered Public Accounting Firm       |       | F-1  |
| Consolidated  Balance Sheets                                    |       | F-2  |
| Consolidated  Statements of Operations                          |       | F-3  |
| Consolidated  Statement of Changes in Stockholders’ Equity |       | F-4  |
| Consolidated  Statements of Cash Flows                          |       | F-5  |
| Notes  to Consolidated Financial Statements                     |       | F-6  |

 

2.     *Financial Statement Schedules:*

All schedules areomitted because they are not applicable or the required information is shown inthe consolidated financial statements or the notes thereto.

3.     *Exhibits:*

| Exhibit   Number | ** ** | **Description of Document**                                                                                                                                |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (f)3.1           |       | Amended and Restated Certificate of Incorporation of  the Registrant.                                                                                      |
| (ff)3.2          |       | Bylaws of the Registrant, as amended and restated  through May 30, 2001.                                                                              |
| (m)4.1           |       | Specimen Common Stock Certificate.                                                                                                                         |
| (l)10.1          |       | Form of Indemnification Agreement between the  Registrant and each of its directors and officers.                                                     |
| (**)(cc)10.2     |       | 1993 Stock Option Plan (as amended through  July 11, 2000).                                                                                           |
| (**) (i)10.3     |       | Forms of stock option agreements under the 1993  Stock Option Plan.                                                                                        |
| (**)(n)10.4      |       | 1996 Directors’ Stock Option Plan, as amended  effective February 7, 2001.                                                                       |
| (**)(t)10.5      |       | 2003 Stock Plan, as amended effective March 10,  2005.                                                                                                |
| (**)(s)10.6      |       | 1998 Employee Stock Purchase Plan, as amended  effective March 1, 2004.                                                                               |
| (*)(b)10.7       |       | Patent License and Royalty Agreement dated  August 30, 1993 between the Registrant and The Jackson Laboratory.                                        |
| (*)(b)10.8       |       | Worldwide License Agreement dated March 1, 1994  between the Registrant and Janssen Biotech, N.V.                                                     |
| (*)(b)10.9       |       | Patent License Agreement dated March 1, 1994  between the Registrant and Cyclex Inc.                                                                  |
| (*)(b)10.10      |       | Patent License and Royalty Agreement dated  November 15, 1993 between the Registrant and The Long Island Jewish  Medical Center.                      |
| (*)(b)10.11      |       | License Agreement dated February 1, 1995  between the Registrant and Pharmos Corporation.                                                             |
| (*)(u)10.12      |       | Know-How Transfer and Cooperation Agreement dated  September 10, 1999 between the Registrant and Pharmachemie B.V.                                    |
| (**)(a)10.13     |       | Executive Employment and Confidential Information  and Invention Assignment Agreement dated January 1, 2004 between  Registrant and James Manuso.     |
| (**)(d)10.14     |       | Executive Employment and Confidential Information  and Invention Assignment Agreement effective January 1, 2007 between  Registrant and James Manuso. |

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| (f)10.15     |   | Office Building Lease dated June 23, 2000  between the Registrant and Koll Dublin Corporate Center, L.P.                                                                                                                                         |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (*)(e)10.16  |   | Asset Purchase Agreement dated January 15, 1997  between the Registrant and Immunex Corporation, a Washington corporation.                                                                                                                       |
| (*)(x)10.17  |   | Drug Substance Validation and Supply Agreement dated  July 2, 2003.                                                                                                                                                                              |
| (*)(g)10.18  |   | License Agreement between Inflazyme Pharmaceuticals  Ltd. and the Registrant dated April 11, 1997.                                                                                                                                               |
| (*)(g)10.19  |   | Nonexclusive Supply Agreement between the Registrant  and Yunnan Hande Technological Development Co. Ltd. dated May 7, 1997.                                                                                                                     |
| (h)10.20     |   | Convertible Secured Note, Option and Warrant  Purchase Agreement dated June 17, 1997 among the Registrant, Tako  Ventures, LLC and, solely as to Sections 5.3 and 5.5 thereof, Lawrence J.  Ellison (the “Tako Purchase Agreement”).   |
| (r)10.21     |   | Amendment No. 1 to the Tako Purchase Agreement  dated March 17, 1999.                                                                                                                                                                       |
| (r)10.22     |   | Stock Purchase Agreement between the Registrant and  Tako dated January 29, 1999.                                                                                                                                                                |
| (*)(j)10.23  |   | License Agreement between Stehlin Foundation for  Cancer Research and the Registrant dated September 3, 1997.                                                                                                                                    |
| (*)(ee)10.24 |   | Amendment No. 1 to License Agreement dated  November 1, 1999 between the Registrant and the Stehlin Foundation for  Cancer Research.                                                                                                        |
| (*)(k)10.25  |   | Supply Agreement dated October 20, 1997 between  the Registrant and Warner-Lambert Company.                                                                                                                                                      |
| (o)10.26     |   | Agreement and Plan of Reorganization by and among  the Registrant, Royale Acquisition Corp., and Sparta  Pharmaceuticals, Inc. dated January 18, 1999.                                                                                      |
| (w)10.27     |   | First Amendment to Agreement and Plan of  Reorganization by and among the Registrant, Royale Acquisition Corp. and  Sparta Pharmaceuticals, Inc. dated May 15, 1999.                                                                        |
| (r)10.28     |   | Standard Industrial/Commercial Multi-Tenant  Lease dated February 12, 1999 between the Registrant and Sea Cliff  Properties, a California general partnership (for the premises at 1075  Serpentine Lane, Pleasanton, California, Suite A). |
| (r)10.29     |   | Standard Industrial/Commercial Multi-Tenant  Lease dated February 12, 1999 between the Registrant and Sea Cliff  Properties, a California general partnership (for the premises at 1075  Serpentine Lane, Pleasanton, California, Suite B). |
| (*)(z)10.30  |   | U.S. Distribution Agreement, Dated December 21,  1999 between the Registrant and Abbott Laboratories.                                                                                                                                            |
| (aa)10.31    |   | Registration Rights Agreement dated  December 15, 1999 between the Registrant and AVI BioPharma, Inc.                                                                                                                                       |
| (aa)10.32    |   | Subscription Agreement dated  December 1, 1999 between the Registrant and AVI BioPharma, Inc.                                                                                                                                               |
| (ee)10.33    |   | Common Stock and Warrant Purchase Agreement dated  April 4, 2000 between the Registrant and AVI BioPharma, Inc.                                                                                                                             |
| (ee)10.34    |   | United States of America Sales, Distribution, and  Development Agreement dated April 4, 2000 between the Registrant and AVI  BioPharma, Inc.                                                                                                |
| (dd)10.35    |   | Registration Rights Agreement dated April 4,  2000 between the registrant and AVI BioPharma, Inc.                                                                                                                                           |
| (ee)10.36    |   | Asset Purchase Agreement dated February 18,  2000 between the Registrant and AMUR Pharmaceuticals, Inc.                                                                                                                                     |
| (ee)10.37    |   | Patent and Intellectual Property Assignment  Agreement dated September 27, 2000 between the Registrant and AMUR  Pharmaceuticals, Inc.                                                                                                      |

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|  (*)(gg)10.38 |   | Supply and Distribution Agreement dated  September 21, 2001 between the Registrant and EuroGen Pharmaceuticals  Ltd.                                                                |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (hh)10.39          |   | Termination and Release Agreement dated  March 4, 2002 between the Registrant and Abbott Laboratories.                                                                              |
| (ii)10.40          |   | Securities Purchase Agreement dated  September 23, 2002 by and between the Registrant and the purchasers  named therein.                                                            |
| (ii)10.41          |   | Registration Rights Agreement dated  September 23, 2002 by and between the Registrant and the purchasers  named therein.                                                            |
| (ii)10.42          |   | Form of Warrant dated September 24, 2002  issued to the purchasers under the Securities Purchase Agreement dated  September 23, 2002.                                     |
| (ii)10.43          |   | Warrant dated September 24, 2002 issued Paul  Revere LLC.                                                                                                                           |
| (jj)10.44          |   | Registration Rights Agreement dated March 22,  2001 by and between the Registrant and The Kriegsman Group.                                                                          |
| (jj)10.45          |   | Warrant A Agreement dated March 22, 2001 by and  between the Registrant and The Kriegsman Group.                                                                                    |
| (bb)10.46          |   | Securities Purchase Agreement dated  February 26, 2003 by and among the Registrant and the purchasers named  therein.                                                               |
| (bb)10.47          |   | Form of Senior Exchangeable/Convertible Note  dated February 26, 2003 issued to the purchasers under the Securities  Purchase Agreement dated February 26, 2003.          |
| (bb)10.48          |   | Registration Rights Agreement dated  February 26, 2003 by and among the Registrant and the purchasers named  therein.                                                               |
| (bb)10.49          |   | Form of Warrant dated February 26, 2003  issued to the purchasers under the Securities Purchase Agreement dated  February 26, 2003.                                       |
| (bb)10.50          |   | Pledge Agreement dated February 26, 2003  executed by the Registrant in favor of the purchasers under the Securities  Purchase Agreement dated February 26, 2003.              |
| (bb)10.51          |   | Securities Account Control Agreement dated  February 26, 2003 by and among the Registrant, the purchasers named  therein, and Mellon Investor Services LLC.                         |
| (*)(m)10.52        |   | License Agreement dated February 13, 2001  between the Registrant and Peregrine Pharmaceuticals, Inc.                                                                          |
| (y)10.53           |   | Securities Purchase Agreement dated June 24,  2003 by and among the Registrant and the purchasers named therein.                                                                    |
| (y)10.54           |   | Form of Senior Convertible Note dated  June 24, 2003 issued to the purchasers under the Securities Purchase  Agreement dated June 24, 2003.                               |
| (y)10.55           |   | Registration Rights Agreement dated June 24,  2003 by and among the Registrant and the purchasers named therein.                                                                    |
| (y)10.56           |   | Form of Warrant dated June 24, 2003 issued  to the purchasers under the Securities Purchase Agreement dated June 24,  2003.                                               |
| (y)10.57           |   | Amended and Restated Pledge Agreement dated  June 24, 2003 executed by the Registrant in favor of the purchasers  under the Securities Purchase Agreement dated June 24, 2003. |
| (y)10.58           |   | Amended and Restated Securities Account Control  Agreement dated June 24, 2003 by and among the Registrant, the  purchasers named therein and Mellon Investor Services LLC.         |
| (y)10.59           |   | Collateral Account Agreement dated June 24,  2003.                                                                                                                                  |
| (y)10.60           |   | Conversion and Amendment Agreement dated  June 24, 2003.                                                                                                                            |
| (y)10.61           |   | Amended and Restated Convertible Notes dated  June 24, 2003.                                                                                                                        |
| (c)10.62           |   | Securities Purchase Agreement dated as of  March 5, 2004 by and among the Registrant and the purchasers named  therein.                                                             |

66

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| (c)10.63    |   | Registration Rights Agreement dated as of  March 5, 2004 by and among the Registrant and the purchasers named  therein.                                                                                                                                                                                           |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (c)10.64    |   | Form of Warrant dated as of March 5, 2004  for issuance under the Securities Purchase Agreement dated March 5, 2004  by and among the Registrant and the purchasers named therein.                                                                                                                      |
| (*)(p)10.65 |   | Purchase and Sale Agreement dated February 17,  2004 between the Registrant and Pfizer Inc.                                                                                                                                                                                                                       |
| (*)(q)10.66 |   | Amended and Restated License Agreement effective  September 21, 2004 between the Registrant and MGI PHARMA, Inc.                                                                                                                                                                                             |
| (q)10.67    |   | Common Stock Purchase Agreement dated  August 31, 2004 between the Registrant and MGI PHARMA, Inc.                                                                                                                                                                                                           |
| (q)10.68    |   | Investor Rights Agreement dated August 31, 2004  between the Registrant and MGI PHARMA, Inc.                                                                                                                                                                                                                 |
| (q)10.69    |   | Warrant dated September 22, 2004 issued to The  Kriegsman Group.                                                                                                                                                                                                                                                  |
| (kk)10.70   |   | Amended and Restated Agreement and Plan of Merger  and Reorganization, dated March 30, 2006, by and among  SuperGen, Inc., King’s Peak Acquisition Corporation, Montigen  Pharmaceuticals, Inc., James Clarke, as Stockholder Representative and  U.S. Bank National Association, as Escrow Agent. |
| (kk)10.71   |   | Form of Volume Restriction Agreement between  SuperGen and each stockholder of Montigen.                                                                                                                                                                                                                          |
| (ll)10.72   |   | Asset Acquisition Agreement, dated June 21,  2006, between SuperGen, Inc and Mayne Pharma (USA), Inc.                                                                                                                                                                                                        |
| (mm)10.73   |   | Asset Acquisition Agreement Amendment dated  August 22, 2006 between SuperGen, Inc. and Mayne Pharma  (USA), Inc.                                                                                                                                                                                       |
| (mm)10.74   |   | Transition Services Agreement dated August 22,  2006 between SuperGen, Inc. and Mayne Pharma (USA), Inc.                                                                                                                                                                                                |
| (mm)10.75   |   | Supply Agreement dated August 22, 2006 between  SuperGen, Inc. and Mayne Pharma (USA), Inc.                                                                                                                                                                                                             |
| (nn)10.76   |   | Amended and Restated Supply and Distribution  Agreement between SuperGen, Inc. and Wyeth, effective June 1, 2006.                                                                                                                                                                                            |
| (oo)10.77   |   | Asset Acquisition Agreement, dated November 25,  2006, between SuperGen, Inc. and Mayne Pharma plc.                                                                                                                                                                                                          |
| 23.1        |   | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                                                                                                             |
| 31.1        |   | Certification of Chief Executive Officer under  Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            |
| 31.2        |   | Certification of Chief Financial Officer under  Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            |
| 32.1        |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                            |

 

----

(*)                Confidentialtreatment has been previously granted for certain portions of these exhibits.

(**)         Indicates a managementcontract or compensatory plan or arrangement.

(a)                 Incorporated byreference from the Registrant’s Report on Form 10-K filed with theSecurities and Exchange Commission on March 4, 2004.

67

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(b)                Incorporated byreference from Amendment No. 1 to the Registrant’s Registration Statementon Form SB-2 (Reg. No. 333-476-LA) filed with theSecurities and Exchange Commission February 26, 1996.

(c)                 Incorporated byreference from the Registrant’s Report on Form 8-K filed with theSecurities and Exchange Commission on March 10, 2004.

(d)                Incorporated byreference from the Registrant’s Report on Form 8-K filed with theSecurities and Exchange Commission on September 25, 2006.

(e)                 Incorporated byreference from the Registrant’s Report on Form 10-K filed with theSecurities and Exchange Commission on March 31, 1997.

(f)                   Incorporated byreference from the Registrant’s Report on Form 10-Q filed with theSecurities and Exchange Commission on August 11, 2000.

(g)                 Incorporated byreference from the Registrant’s Report on Form 10-Q filed with theSecurities and Exchange Commission on May 15, 1997.

(h)                Incorporated byreference from the Registrant’s Report on Form 8-K filed with theSecurities and Exchange Commission on July 2, 1997.

(i)                   Incorporated byreference from the Registrant’s Report on Form 10-Q filed with theSecurities and Exchange Commission on August 13, 1997.

(j)                    Incorporatedby reference from Amendment No. 2 on Form S-3 to theRegistrant’s Registration Statement on Form SB-2 (Reg. No. 333-476-LA)filed with the Securities and Exchange Commission on October 6, 1997.

(k)                Incorporated byreference from the Registrant’s Report on Form 8-K filed with theSecurities and Exchange Commission on October 31, 1997.

(l)                   Incorporated byreference from the Registrant’s Report on Form 10-K filed with theSecurities and Exchange Commission on March 31, 2003.

(m)            Incorporated byreference from the Registrant’s Report on Form 10-K/A filed with theSecurities and Exchange Commission on May 12, 2003.

(n)                Incorporated byreference from the Registrant’s Proxy Statement filed with the Securities andExchange Commission on April 17, 2001.

(o)                Incorporated byreference from the Registrant’s Report on Form 8-K filed with theSecurities and Exchange Commission on January 28, 1999.

(p)                Incorporated byreference from the Registrant’s Report on Form 10-Q filed with theSecurities and Exchange Commission on May 10, 2004.

(q)                Incorporated byreference from the Registrant’s Report on Form 10-Q filed with theSecurities and Exchange Commission on November 9, 2004.

(r)                  Incorporated byreference from the Registrant’s Report on Form 10-K filed with theSecurities and Exchange Commission on March 31, 1999.

(s)                  Incorporated byreference fro the Registrant’s Registration Statement on Form S-8(Reg. No. 333-120505) filed with the Securities and ExchangeCommission on November 15, 2004.

(t)                   Incorporated byreference from the Registrant’s Registration Statement on Form S-8(Reg. No. 333-127073) filed with the Securities and ExchangeCommission on August 1, 2005.

(u)                Incorporatedby reference from the Registrant’s Report on Form  10-Q filed withthe Securities and Exchange Commission on November 15, 1999.

68

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(v)                 Incorporated byreference from the Registrant’s Registration Statement on Form S-8(Reg. No. 333-87369) filed with the Securities and ExchangeCommission on September 17, 1999.

(w)              Incorporated by referencefrom the Registrant’s Registration Statement on Form S-4 (Reg.No. 333-80517) filed with the Securities and Exchange Commission onJune 11, 1999.

(x)                 Incorporated byreference from the Registrant’s Report on Form 10-Q filed with theSecurities and Exchange Commission on August 14, 2003.

(y)                 Incorporated byreference from the Registrant’s Report on Form 8-K datedJune 24, 2003 filed with the Securities and Exchange Commission onJune 25, 2003.

(z)                 Incorporated byreference from the Registrant’s Report on Form 8-K/A datedDecember 22, 1999 filed with the Securities and Exchange Commission onJanuary 7, 2000.

(aa)           Incorporated byreference from the Registrant’s Registration Statement on Form S-3(Reg. No. 333-95177) filed with the Securities and ExchangeCommission on January 21, 2000.

(bb)         Incorporated by referencefrom the Registrant’s Report on Form 8-K dated February 26,2003 filed with the Securities and Exchange Commission on February 27,2003.

(cc)           Incorporated byreference from the Registrant’s Registration Statement on Form S-8(Reg. No. 333-44736) filed with the Securities and ExchangeCommission on August 29, 2000.

(dd)         Incorporated by referencefrom the Registrant’s Registration Statement on Form S-3 (Reg.No. 333-52326) filed with the Securities and Exchange Commission onDecember 20, 2000.

(ee)           Incorporated byreference from the Registrant’s Report on Form 10-K filed with theSecurities and Exchange Commission on March 23, 2001.

(ff)               Incorporated byreference from the Registrant’s Report on Form 10-Q filed with theSecurities and Exchange Commission on August 14, 2001.

(gg)           Incorporated byreference from the Registrant’s Report on Form  10-Q filed with theSecurities and Exchange Commission on November 14, 2001.

(hh)         Incorporated by referencefrom the Registrant’s Report on Form 8-K dated March 4, 2002filed with the Securities and Exchange Commission on March 8, 2002.

(ii)               Incorporated byreference from the Registrant’s Report on Form 8-K datedSeptember 23, 2002 filed with the Securities and Exchange Commission onOctober 1, 2002.

(jj)                 Incorporated byreference from the Registrant’s Registration Statement on Form S-3(Reg. No. 333-100707) filed with the Securities and ExchangeCommission on October 24, 2002.

(kk)         Incorporated by referencefrom the Registrant’s Report on Form 8-K dated April 4, 2006filed with the Securities and Exchange Commission on April 7, 2006.

(ll)               Incorporated byreference from the Registrant’s Report on Form 8-K datedJune 21, 2006 filed with the Securities and Exchange Commission onJune 27, 2006.

(mm)                     Incorporatedby reference from the Registrant’s Report on Form 8-K datedAugust 22, 2006 filed with the Securities and Exchange Commission onAugust 28, 2006.

(nn)         Incorporated by referencefrom the Registrant’s Report on Form 10-Q filed with the Securitiesand Exchange Commission on August 9, 2006.

(oo)         Incorporated by referencefrom the Registrant’s Report on Form 8-K dated November 25,2006 filed with the Securities and Exchange Commission on November 28,2006.

(b)   *Exhibits.*SeeItem 15(a) above.

(c)    *Financial StatementSchedules.* See Item 15(a) above.

69

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and StockholdersSuperGen, Inc.

We have audited the accompanying consolidated balancesheets of SuperGen, Inc. as of December 31, 2006 and 2005, and therelated consolidated statements of operations, changes in stockholders’ equity,and cash flows for each of the three years in the period endedDecember 31, 2006. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

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

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of SuperGen, Inc. at December 31, 2006 and 2005 and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2006, in conformity with U.S.generally accepted accounting principles.

As discussed in Note 1 to the consolidated financialstatements, the Company adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004), *Share-BasedPayment*, effective January 1, 2006.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness ofSuperGen, Inc.’s internal control over financial reporting as ofDecember 31, 2006, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission and our report dated March 15, 2007 expressed an unqualifiedopinion on management’s assessment and an adverse opinion on the effectivenessof the Company’s internal control over financial reporting because of theexistence of a material weakness.

|                   | /s/ ERNST & YOUNG LLP |
|------------------------|--------------------------------|
| Palo Alto,  California |                           |
| March 15,  2007   |                           |

 

F-1

----

**SUPERGEN, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts)**

| ** **                                                                                                                                                               | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                          |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                               |       | $                     | 67,704     |   | $ | 47,664 |   |
| Accounts receivable, net                                                                                                                                                 |       | 489                   |       | 5,576 |   |
| Development revenue  receivable from MGI PHARMA, Inc.                                                                                                                    |       | 29                    |       | 550 |   |
| Accounts receivable,  Mayne Pharma                                                                                                                                       |       | 1,502                 |       | — |   |
| Inventories, net                                                                                                                                                         |       | 223                   |       | 1,439 |   |
| Prepaid distribution and  marketing rights                                                                                                                               |       | 630                   |       | — |   |
| Prepaid expenses and  other current assets                                                                                                                               |       | 1,111                 |       | 1,407 |   |
| Total current assets                                                                                                                                                     |       | 71,688                |       | 56,636 |   |
| Marketable securities,  non-current                                                                                                                                      |       | 179                   |       | 147 |   |
| Investment in stock of  related parties                                                                                                                                  |       | 659                   |       | 673 |   |
| Due from related  parties, non-current                                                                                                                                   |       | 31                    |       | 52 |   |
| Property, plant and  equipment, net                                                                                                                                      |       | 3,752                 |       | 2,907 |   |
| Goodwill                                                                                                                                                                 |       | 731                   |       | 731 |   |
| Other intangibles, net                                                                                                                                                   |       | 958                   |       | 290 |   |
| Restricted cash and  investments, non-current                                                                                                                            |       | 10,043                |       | 11,805 |   |
| Other assets                                                                                                                                                             |       | 5                     |       | 30 |   |
| Total assets                                                                                                                                                             |       | $                     | 88,046     |   | $ | 73,271 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                           |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                     |       |                  |       |   |   |
| Accounts payable and  accrued liabilities                                                                                                                                |       | $                     | 5,202      |   | $ | 3,391 |   |
| Derivative liability                                                                                                                                                     |       | —                |       | 1,817 |   |
| Payable to AVI  BioPharma, Inc.                                                                                                                                     |       | 565                   |       | 565 |   |
| Deferred gain on sale of  products to Mayne Pharma                                                                                                                       |       | 11,754                |       | — |   |
| Deferred revenue                                                                                                                                                         |       | 459                   |       | — |   |
| Accrued payroll and  employee benefits                                                                                                                                   |       | 3,296                 |       | 2,269 |   |
| Total current  liabilities                                                                                                                                               |       | 21,276                |       | 8,042 |   |
| Deferred rent                                                                                                                                                            |       | 938                   |       | 972 |   |
| Total liabilities                                                                                                                                                        |       | 22,214                |       | 9,014 |   |
| Commitments and contingencies                                                                                                                                            |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                               |       |                  |       |   |   |
| Preferred stock, $.001  par value; 2,000,000 shares authorized; none outstanding                                                                                         |       | —                |       | — |   |
| Common stock, $.001 par  value; 150,000,000 shares authorized; 55,177,377 and 51,710,912 shares issued  and outstanding at December 31, 2006 and 2005, respectively |       | 55                    |       | 52 |   |
| Additional paid in  capital                                                                                                                                              |       | 429,147               |       | 409,365 |   |
| Accumulated other  comprehensive gain                                                                                                                                    |       | 1,922                 |       | 2,850 |   |
| Accumulated deficit                                                                                                                                                      |       | (365,292              | )          | (348,010 | ) |
| Total stockholders’  equity                                                                                                                                         |       | 65,832                |       | 64,257 |   |
| Total liabilities and stockholders’ equity                                                                                                                          |       | $                     | 88,046     |   | $ | 73,271 |   |

 

See accompanying notes to consolidated financial statements

F-2

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**SUPERGEN, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)**

| ** **                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                                     |       |                                  |       |   |   |   |   |
| Net product revenue                                                                           |       | $                                     | 9,563      |   | $ | 16,059 |   | $ | 13,127 |   |
| Development and license revenue from MGI PHARMA,  Inc.                                        |       | 25,093                                |       | 13,353 |   | 18,866 |   |
| Royalty revenue                                                                               |       | 3,427                                 |       | — |   | — |   |
| Distribution agreement and other revenue                                                      |       | —                                |       | 757 |   | — |   |
| Total revenues                                                                                |       | 38,083                                |       | 30,169 |   | 31,993 |   |
| Costs and  operating expenses:                                                                |       |                                  |       |   |   |   |   |
| Cost of product revenue                                                                       |       | 2,003                                 |       | 3,051 |   | 4,135 |   |
| Research and development                                                                      |       | 16,544                                |       | 15,059 |   | 23,978 |   |
| Selling, general, and administrative                                                          |       | 24,714                                |       | 28,046 |   | 28,800 |   |
| Acquired in-process research and development                                                  |       | 16,318                                |       | — |   | — |   |
| Total costs and operating expenses                                                            |       | 59,579                                |       | 46,156 |   | 56,913 |   |
| Loss from operations                                                                          |       | (21,496                               | )          | (15,987 | ) | (24,920 | ) |
| Interest income                                                                               |       | 2,746                                 |       | 1,727 |   | 624 |   |
| Interest expense                                                                              |       | —                                |       | — |   | (2,338 | ) |
| Gain on  disposition of investment in AVI BioPharma stock resulting from exercise of  warrant |       | 780                                   |       | — |   | — |   |
| Amortization of  deemed discount on convertible debt                                          |       | —                                |       | — |   | (12,657 | ) |
| Foreign currency  transaction gain                                                            |       | 241                                   |       | — |   | — |   |
| Other than temporary decline in value of investments                                          |       | —                                |       | (11 | ) | (7,851 | ) |
| Change in  valuation of derivatives                                                           |       | 1,817                                 |       | (211 | ) | 282 |   |
| Loss before  income tax                                                                       |       | (15,912                               | )          | (14,482 | ) | (46,860 | ) |
| Income tax provision                                                                          |       | (575                                  | )          | — |   | — |   |
| Net loss                                                                                      |       | $                                     | (16,487    | ) | $ | (14,482 | ) | $ | (46,860 | ) |
| Net loss per common  share:                                                                   |       |                                  |       |   |   |   |   |
| Basic and diluted  net loss per comon share                                                   |       | $                                     | (0.31      | ) | $ | (0.28 | ) | $ | (1.04 | ) |
| Weighted average shares  used in basic and diluted net loss per common share calculation      |       | 53,439                                |       | 51,309 |   | 44,953 |   |

 

See accompanying notes to consolidated financial statements

F-3

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**SUPERGEN, INC.CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY(in thousands)**

| ** **                                                                                                  | ** ** | ** **            | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated**      | ** ** | ** **  | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|----------------------|------------|-------------|------------|------------|------------|
| ** **                                                                                                  | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**    | ** ** | **Other**            | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                                                                  | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Comprehensive** | ** ** | **Accumulated**      | ** ** | ** **  | ** ** |
| ** **                                                                                                  | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**       | ** ** | **Gain (Loss)** | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| Balances at  January 1, 2004                                                                           |       |                  | 37,022     |             |       |              | $          | 37                   |       |        |       | $          | 316,578    |   |   |   | $ | (3,100 | ) |   |   | $ | (286,668 | ) |   | $ | 26,847 |   |
| Comprehensive loss:                                                                                         |       |                  |       |             |       |              |       |                 |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                    |       |                  | —     |             |       |              | —     |                 |       |        | —     |       |       |   | — |   |   |   | (46,860 | ) |   | (46,860 | ) |
| Other than temporary  decline in value of investments                                                       |       |                  | —     |             |       |              | —     |                 |       |        | —     |       |       |   | 7,851 |   |   |   | — |   |   | 7,851 |   |
| Other comprehensive loss—Change  in unrealized gain (loss)  on investments                             |       |                  | —     |             |       |              | —     |                 |       |        | —     |       |       |   | (4,850 | ) |   |   | — |   |   | (4,850 | ) |
| Comprehensive loss                                                                                          |       |                  |       |             |       |              |       |                 |       |        |       |       |       |   |   |   |   |   |   |   |   | (43,859 | ) |
| Issuance of common stock  upon conversion of senior  convertible notes and payment of related interest      |       |                  | 4,750      |             |       |              | 5          |                 |       |        | 26,788     |       |       |   | — |   |   |   | — |   |   | 26,793 |   |
| Issuance of common stock  to MGI Pharma, net of offering  costs of $2,058                                   |       |                  | 4,000      |             |       |              | 4          |                 |       |        | 23,658     |       |       |   | — |   |   |   | — |   |   | 23,662 |   |
| Issuance of common stock  and warrants in private placement, net of offering costs of $1,775                |       |                  | 4,900      |             |       |              | 5          |                 |       |        | 32,520     |       |       |   | — |   |   |   | — |   |   | 32,525 |   |
| Issuance of common stock  to Peregrine Pharmaceuticals in connection with license agreement                 |       |                  | 19         |             |       |              | —     |                 |       |        | 200        |       |       |   | — |   |   |   | — |   |   | 200 |   |
| Issuance of common stock  to Stehlin Foundation for  milestone payment in connection with license agreement |       |                  | 64         |             |       |              | —     |                 |       |        | 500        |       |       |   | — |   |   |   | — |   |   | 500 |   |
| Issuance of common stock  upon exercise of stock options,  net of 14 shares surrendered as proceeds         |       |                  | 311        |             |       |              | —     |                 |       |        | 1,220      |       |       |   | — |   |   |   | — |   |   | 1,220 |   |
| Issuance of common stock  in connection  with employee stock purchase plan                                  |       |                  | 61         |             |       |              | —     |                 |       |        | 342        |       |       |   | — |   |   |   | — |   |   | 342 |   |
| Compensation expense from  stock option and warrant  grants to consultants and vendors                      |       |                  | —     |             |       |              | —     |                 |       |        | 200        |       |       |   | — |   |   |   | — |   |   | 200 |   |
| Net change in valuation  of warrants issued  in connection with private placement                           |       |                  | —     |             |       |              | —     |                 |       |        | 3,616      |       |       |   | — |   |   |   | — |   |   | 3,616 |   |
| Compensation expense from  issuance of warrants to  placement agent of MGI Pharma stock issuance            |       |                  | —     |             |       |              | —     |                 |       |        | 513        |       |       |   | — |   |   |   | — |   |   | 513 |   |
| Compensation expense  related to acceleration of  stock option grants                                       |       |                  | —     |             |       |              | —     |                 |       |        | 654        |       |       |   | — |   |   |   | — |   |   | 654 |   |
| Balances at  December 31, 2004                                                                         |       |                  | 51,127     |             |       |              | 51         |                 |       |        | 406,789    |       |       |   | (99 | ) |   |   | (333,528 | ) |   | 73,213 |   |
| Comprehensive loss:                                                                                         |       |                  |       |             |       |              |       |                 |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                    |       |                  | —     |             |       |              | —     |                 |       |        | —     |       |       |   | — |   |   |   | (14,482 | ) |   | (14,482 | ) |
| Other than temporary  decline in value of investments                                                       |       |                  | —     |             |       |              | —     |                 |       |        | —     |       |       |   | 11 |   |   |   | — |   |   | 11 |   |
| Other comprehensive loss—Change  in unrealized gain  (loss) on investments                             |       |                  | —     |             |       |              | —     |                 |       |        | —     |       |       |   | 2,938 |   |   |   | — |   |   | 2,938 |   |
| Comprehensive loss                                                                                          |       |                  |       |             |       |              |       |                 |       |        |       |       |       |   |   |   |   |   |   |   |   | (11,533 | ) |
| Issuance of common stock  upon exercise of stock options                                                    |       |                  | 273        |             |       |              | 1          |                 |       |        | 924        |       |       |   | — |   |   |   | — |   |   | 925 |   |
| Issuance of common stock  in connection with employee  stock purchase plan                                  |       |                  | 52         |             |       |              | —     |                 |       |        | 205        |       |       |   | — |   |   |   | — |   |   | 205 |   |
| Issuance of common stock  upon exercise of warrants                                                         |       |                  | 259        |             |       |              |       |                 |       |        | 1,047      |       |       |   | — |   |   |   | — |   |   | 1,047 |   |
| Compensation expense from  stock option grants to  consultants                                              |       |                  | —     |             |       |              | —     |                 |       |        | 132        |       |       |   | — |   |   |   | — |   |   | 132 |   |
| Compensation expense  related to  acceleration of stock option grants                                       |       |                  | —     |             |       |              | —     |                 |       |        | 268        |       |       |   | — |   |   |   | — |   |   | 268 |   |
| Balances at  December 31, 2005                                                                         |       |                  | 51,711     |             |       |              | 52         |                 |       |        | 409,365    |       |       |   | 2,850 |   |   |   | (348,010 | ) |   | 64,257 |   |
| Comprehensive loss:                                                                                         |       |                  |       |             |       |              |       |                 |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                    |       |                  | —     |             |       |              | —     |                 |       |        | —     |       |       |   | — |   |   |   | (16,487 | ) |   | (16,487 | ) |
| Other comprehensive loss—Change  in unrealized  gain (loss) on investments                             |       |                  | —     |             |       |              | —     |                 |       |        | —     |       |       |   | (613 | ) |   |   | — |   |   | (613 | ) |
| Comprehensive loss                                                                                          |       |                  |       |             |       |              |       |                 |       |        |       |       |       |   |   |   |   |   |   |   |   | (17,100 | ) |
| Reclassification  adjustment for gains included in net loss                                                 |       |                  |       |             |       |              |       |                 |       |        |       |       |       |   | (315 | ) |   |   |   |   |   | (315 | ) |
| Cumulative effect  adjustment for adoption of SAB 108                                                       |       |                  |       |             |       |              |       |                 |       |        |       |       |       |   |   |   |   |   | (795 | ) |   | (795 | ) |
| Issuance of common stock  to acquire  Montigen Pharmaceuticals                                              |       |                  | 1,625      |             |       |              | 1          |                 |       |        | 8,947      |       |       |   | — |   |   |   | — |   |   | 8,948 |   |
| Issuance of common stock  upon exercise of stock options                                                    |       |                  | 130        |             |       |              | —     |                 |       |        | 608        |       |       |   | — |   |   |   | — |   |   | 608 |   |
| Issuance of common stock  in connection with employee stock purchase plan                                   |       |                  | 45         |             |       |              | —     |                 |       |        | 173        |       |       |   | — |   |   |   | — |   |   | 173 |   |
| Issuance of common stock  upon exercise of warrants                                                         |       |                  | 1,666      |             |       |              | 2          |                 |       |        | 6,682      |       |       |   | — |   |   |   | — |   |   | 6,684 |   |
| Compensation expense from  stock option  grants to employees and consultants                                |       |                  | —     |             |       |              | —     |                 |       |        | 3,372      |       |       |   | — |   |   |   | — |   |   | 3,372 |   |
| Balances at  December 31, 2006                                                                         |       |                  | 55,177     |             |       |              | $          | 55                   |       |        |       | $          | 429,147    |   |   |   | $ | 1,922 |   |   |   | $ | (365,292 | ) |   | $ | 65,832 |   |

 

See accompanying notes to consolidated financial statements

F-4

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**SUPERGEN, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                                 | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating activities:                                                                      |       |                                       |       |   |   |   |   |
| Net loss                                                                                   |       | $                                          | (16,487    | ) | $ | (14,482 | ) | $ | (46,860 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                       |       |   |   |   |   |
| Depreciation                                                                               |       | 851                                        |       | 834 |   | 1,058 |   |
| Amortization of intangibles and distribution and  marketing rights                         |       | 2,079                                      |       | 387 |   | 799 |   |
| Amortization of deferred revenue                                                           |       | —                                     |       | (9,905 | ) | (2,720 | ) |
| Amortization of prepaid financing costs                                                    |       | —                                     |       | — |   | 1,811 |   |
| Amortization of deemed discount on convertible debt                                        |       | —                                     |       | — |   | 12,657 |   |
| Interest on convertible debt paid in common stock                                          |       | —                                     |       | — |   | 543 |   |
| Change in valuation of derivatives                                                         |       | (1,817                                     | )          | 211 |   | (282 | ) |
| Other than temporary decline in value of investments                                       |       | —                                     |       | 11 |   | 7,851 |   |
| Stock compensation expense                                                                 |       | 3,373                                      |       | 400 |   | 854 |   |
| Gain on disposition of investment in AVI BioPharma  stock                                  |       | (780                                       | )          | — |   | — |   |
| Cash paid for distribution and marketing rights                                            |       | (2,100                                     | )          | — |   | — |   |
| Milestone, license, and research payments made in  common stock                            |       | —                                     |       | — |   | 700 |   |
| Acquired in-process research and development                                               |       | 16,318                                     |       | — |   | — |   |
| Write-off of investment in private company                                                 |       | —                                     |       | 180 |   | — |   |
| Cash option paid in termination of distribution  agreement                                 |       | —                                     |       | (1,500 | ) | — |   |
| Changes in  operating assets and liabilities:                                              |       |                                       |       |   |   |   |   |
| Accounts receivable and development revenue  receivable                                    |       | 4,106                                      |       | 11,609 |   | (17,228 | ) |
| Inventories                                                                                |       | 791                                        |       | 1,867 |   | 659 |   |
| Prepaid expenses and other assets                                                          |       | (309                                       | )          | (4 | ) | 1,030 |   |
| Due from related parties                                                                   |       | 21                                         |       | 41 |   | 344 |   |
| Restricted cash and investments                                                            |       | 97                                         |       | (73 | ) | (36 | ) |
| Accounts payable and other liabilities                                                     |       | 1,112                                      |       | (1,068 | ) | 1,141 |   |
| Deferred gain on sale of products to Mayne Pharma                                          |       | (481                                       | )          | — |   | — |   |
| Deferred revenue                                                                           |       | 459                                        |       | (167 | ) | 13,138 |   |
| Net cash provided by (used in) operating activities                                        |       | 7,233                                      |       | (11,659 | ) | (24,541 | ) |
| Investing activities:                                                                      |       |                                       |       |   |   |   |   |
| Purchases of marketable securities                                                         |       | —                                     |       | (11,585 | ) | (37,612 | ) |
| Sales or maturities of marketable securities                                               |       | 1,500                                      |       | 29,845 |   | 28,336 |   |
| Purchases of property and equipment                                                        |       | (860                                       | )          | (106 | ) | (273 | ) |
| Release of restricted cash from collateral account                                         |       | —                                     |       | 598 |   | 10,680 |   |
| Purchase of intangible assets                                                              |       | —                                     |       | — |   | (1,000 | ) |
| Proceeds from sale of products to Mayne Pharma                                             |       | 13,395                                     |       | — |   | — |   |
| Acquisition of Montigen net assets, net of cash  acquired                                  |       | (8,693                                     | )          | — |   | — |   |
| Net cash provided by investing activities                                                  |       | 5,342                                      |       | 18,752 |   | 131 |   |
| Financing activities:                                                                      |       |                                       |       |   |   |   |   |
| Proceeds from issuance of common stock, net of  issuance costs                             |       | 7,465                                      |       | 2,177 |   | 57,749 |   |
| Net cash provided by financing activities                                                  |       | 7,465                                      |       | 2,177 |   | 57,749 |   |
| Net increase in cash and cash equivalents                                                  |       | 20,040                                     |       | 9,270 |   | 33,339 |   |
| Cash and cash equivalents at beginning of period                                           |       | 47,664                                     |       | 38,394 |   | 5,055 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                          | 67,704     |   | $ | 47,664 |   | $ | 38,394 |   |
| Supplemental  Disclosure of Non-Cash Financing Activities:                                 |       |                                       |       |   |   |   |   |
| Common stock issued in connection with Montigen  acquisition                               |       | $                                          | 8,947      |   | $ | — |   | $ | — |   |
| Conversion of convertible notes into common stock                                          |       | $                                          | —     |   | $ | — |   | $ | 26,250 |   |
| Valuation of warrants issued to placement agent in  connection with license agreement      |       | $                                          | —     |   | $ | — |   | $ | 513 |   |
| Supplemental Disclosure  of Cash Flow Information:                                         |       |                                       |       |   |   |   |   |
| Income taxes paid  in cash during the year                                                 |       | $                                          | 450        |   | $ | — |   | $ | — |   |

 

See accompanying notes to consolidated financial statements

F-5

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1. Summary of SignificantAccounting Policies**

**Description ofBusiness**

SuperGen, Inc. (“SuperGen,”“we,” “us” or the “Company”) was incorporated in California in March 1991.We changed our state of incorporation to Delaware in 1997. We are apharmaceutical company dedicated to the development and commercialization ofoncology therapies for solid tumors, hematological malignancies and blooddisorders. We operate in one industry segment.

**Principles ofConsolidation**

Our consolidated financialstatements include the accounts of EuroGen Pharmaceuticals Ltd. (“EuroGen”),Sparta Pharmaceuticals, Inc. (“Sparta”) and seven wholly-ownedsubsidiaries, which are immaterial. Intercompany accounts and transactions areeliminated in consolidation. We consolidate all of our wholly-owned andmajority-owned subsidiaries.

**Foreign Currency**

The functional currency ofthe Company’s foreign subsidiaries is the U.S. dollar. Foreign currency assetsand liabilities are remeasured into U.S. dollars at the current exchange ratesas of the applicable balance sheet date, except for nonmonetary assets andliabilities, which are remeasured at historical exchange rates. Revenue andexpenses are remeasured at the average exchange rate prevailing during theperiod, except for those expenses related to the previously noted balance sheetamounts, which are remeasured at historical exchange rates. Gains and lossesresulting from foreign currency remeasurement are included in net foreigncurrency transaction gain or loss in the accompanying consolidated statementsof operations. During 2006, we recorded transaction gains on foreign currencyexchange relating to activities of our subsidiary EuroGen, reflecting increasedactivity at EuroGen that began selling and distributing Nipent in 2006. Prioryear transaction gains or losses were not material and were included inoperating expenses.

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results may differ from those estimates.

**Fair Value ofFinancial Instruments**

The fair values of ourcash equivalents and marketable securities are based on quoted market prices. Thecarrying values of accounts receivable and accounts payable are considered tobe representative of their respective fair values at December 31, 2006 and2005.

**Revenue Recognition**

Our net product revenuesrelate principally to two pharmaceutical products, with Nipent® salesrepresenting 88% in 2006, 93% in 2005, and 87% in 2004. We recognize salesrevenue upon shipment, provided that title to the products has been transferredat the point of shipment; if title of product transfers at point of receipt bythe customer, revenue is recognized upon customer receipt of the shipment, andcollectibility is reasonably assured, with allowances provided for bad debt andestimated returns. 

F-6

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**1.Summary of Significant Accounting Policies (Continued)**

Beginningin 2005, we also provided allowances for estimated cash discounts andchargebacks. We record estimated allowances for sales reserves against productrevenues for returns, payment discounts, and chargebacks based on historicalreturn patterns for returns, contractual terms for discounts and chargebacks,and expectations regarding utilization rates for these programs. Actual amountsfor returns and allowances, cash discounts, and chargebacks may differ from ourestimates and such differences could be material to the consolidated financialstatements. The allowance for bad debt was $53,000 and $10,000 at December 31,2006 and 2005, respectively. The allowance for sales returns was $306,000 and$150,000 at December 31, 2006 and 2005, respectively. At December 31,2006, the allowance for sales returns exceed our accounts receivable balance,and is included in accounts payable and accrued liabilities. The allowance forcash discounts was $1,500 and $120,000 at December 31, 2006 and 2005,respectively. The allowance for chargebacks was zero at December 31, 2006,and $500,000 at December 31, 2005. The provision for returns andallowances was $418,000 in 2006, $52,000 in 2005, and $63,000 in 2004. Werecorded provisions for chargebacks of $910,000 in 2006 and $525,000 in 2005,and zero in 2004.

Cash advance payments received in connection withdistribution agreements, license agreements, or research grants are deferredand recognized ratably over the period of the respective agreements or untilservices are performed. We recognize cost reimbursement revenue undercollaborative agreements as the related research and development costs areincurred. We recognize milestone fees upon completion of specified milestonesaccording to contract terms. We recognize royalty revenue on a cash basis when we receive it fromMGI because we do not have sufficient ability to accurately estimate Dacogensales. Deferred revenue represents the portion of product shipments toWyeth that have not been delivered to the end customer.

Our principal customersare clinics, hospitals and hospital buying groups in the United States and drugdistributors and wholesalers in the United States and Europe. We do not requirecollateral from our customers. We operate in one business segment—humantherapeutics. In 2006 and 2005, 94% of our net product revenues were made inthe United States and 6% in the European Union (“EU”). In 2004, 89% of our netproduct revenues were made in the United States and 11% were made in the EU.

**Advertising Expense**

Advertising costs areexpensed as incurred. We incurred advertising costs of $19,000 in 2006,$326,000 in 2005, and $424,000 in 2004.

**Research andDevelopment**

Research and developmentexpenditures, including direct and allocated expenses, are charged to expenseas incurred.  These expenditures includesalaries and employee-related expenses; fees paid to physicians, hospitals, orother research institutions for clinical and pre-clinical studies; fees paid tooutside contractors for monitoring of clinical sites or collection and analysisof data; costs associated with the research and manufacture of clinical drugsupplies; and payments made under technology license agreements prior toregulatory approval of drug candidates.

F-7

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**1.Summary of Significant Accounting Policies (Continued)**

**Cash, CashEquivalents and Marketable Securities**

Cash and cash equivalents include bank demanddeposits, certificates of deposit, marketable securities with maturities ofthree months or less when purchased and money market funds which investprimarily in U.S. government obligations and commercial paper. Theseinstruments are highly liquid and are subject to insignificant market risk.

Marketable securities consist of corporate orgovernment debt securities and equity securities that have a readilyascertainable market value and are readily marketable. These investments arereported at fair value. All marketable securities are designated as available-for-sale,with unrealized gains and losses included in accumulated other comprehensivegain/loss in stockholders’ equity. A decline in the market value of a securitybelow its cost that is deemed to be other than temporary is charged toearnings, and results in the establishment of a new cost basis for thesecurity.

During the year ended December 31,2005, we recorded a write-down of $11,000 related to the other than temporarydecline in the value of our equity investment in Inflazyme Pharmaceuticals. Duringthe year ended December 31, 2004, we recorded a write-down of $7,851,000related to the other than temporary decline in the value of our equityinvestment in AVI BioPharma, Inc. (“AVI”). We had no such write-downs in2006.

**Equity Investments**

Equity investments insecurities without readily determinable fair value, primarily related toinvestments in privately held companies, are carried at cost. These investmentsare included in marketable securities and investment in stock of relatedparties on the balance sheet. We periodically review those carried at cost andevaluate whether an impairment has occurred. During 2005, we determined thatthe value of investments in stock of a related party made in 2001 and 2003 wereimpaired due to the uncertain viability of the company as a going concern. As aresult, the entire cost of the investment of $180,000 was charged to selling,general, and administrative expense in 2005. We had no such write-offs in 2006or 2004. We believe the remaining equity investments and investments in relatedparties continue to be realizable. The cost of securities sold or the amountreclassified out of accumulated other comprehensive income or loss intoearnings is based on the specific identification method.

**Restricted Cash andInvestments**

Under one of our operatinglease agreements and in connection with certain outstanding warrants as notedin Note 10 below, we are required to set aside cash and/or investments ascollateral. At December 31, 2006 and 2005, we had $10,043,000 and$11,805,000, respectively, of restricted cash and investments related to such agreements.

F-8

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**1.Summary of Significant Accounting Policies (Continued)**

**Inventories**

Inventoriesare stated at the lower of cost (using the first-in, first-outmethod) or market value. Inventories were as follows at December 31 (inthousands):

| ** **      | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | —     |     | $          | 67 |   |
| Work in process |       | 126      |       | 197      |       |
| Finished goods  |       | 97       |       | 1,175    |       |
|            |       | $        | 223        |     | $          | 1,439 |   |

 

At December 31, 2005,we established a reserve for product obsolescence of $400,000, relating to thepotential expiration of finished goods inventory. At December 31, 2006,the reserve for product obsolescence was $58,000, relating to the potentialexpiration of work in process inventory.

**Property, Plant andEquipment**

Property, plant and equipment are stated at cost.Depreciation of building, office and manufacturing equipment and furniture andfixtures is provided on a straight-line basis over the estimated originaluseful lives of the respective assets, as noted below. Leasehold improvementsare amortized over the shorter of the life of the lease or their estimateduseful lives using the straight-line method.

Property,plant and equipment consist of the following at December 31 (inthousands):

| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **Estimated  Useful Lives** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------------------------------|------------|
| Land and building                               |       | $        | 2,433      |     | $          | 2,433                            |       | 31  years |   |
| Leasehold  improvements                         |       | 2,642    |       | 2,611    |       | 5-10  years                      |       |
| Equipment                                       |       | 1,270    |       | 1,008    |       | 5  years                         |       |
| Furniture and  fixtures                         |       | 4,161    |       | 3,674    |       | 3-5  years                       |       |
| Construction in  process                        |       | 488      |       | —   |       | N/A                              |       |
| Total property  and equipment                   |       | 10,994   |       | 9,726    |       |                             |       |
| Less accumulated  depreciation and amortization |       | (7,242   | )          | (6,819   | )          |                             |       |
| Property, plant and  equipment, net             |       | $        | 3,752      |     | $          | 2,907                            |       |   |   |

 

**Goodwill**

Goodwill and indefinitelived intangible assets are reviewed annually, or more frequently if impairmentindicators arise, for impairment. Intangible assets with finite useful livesare amortized over their respective lives, and are also reviewed annually, ormore frequently if impairment indicators arise, for impairment. Goodwill nolonger subject to amortization amounted to $731,000 at December 31, 2006and 2005.

**Intangible Assets**

In February 2004, we entered into a Purchase andSale Agreement with Pfizer Inc. to acquire European marketing rights forNipent, our drug that is currently approved for marketing in the 

F-9

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**1.Summary of Significant Accounting Policies (Continued)**

United States forhairy cell leukemia. We paid Pfizer $1,000,000 under this agreement and haveclassified this amount in Other intangibles in the accompanying balance sheet. Thisamount was amortized over 31 months, the estimated life of the benefitperiod. Accumulated amortization was $710,000 at December 31, 2005, andwas fully amortized at December 31, 2006.

In April 2006, we acquired certain intangibleassets relating to our acquisition of Montigen Pharmaceuticals, Inc. (“Montigen”)(see Note 6 below). We assigned values of $235,000 to assembled workforce and$1,042,000 to CLIMBTM technology platform, which are being amortized over threeyears, the estimated useful lives of the assets. The accumulated amortizationof the assembled workforce and CLIMB technology was $59,000 and $260,000,respectively at December 31, 2006. We expect to record amortization of theassembled workforce of $78,000, $78,000, and $20,000 in 2007, 2008, and 2009, respectively. We expect to recordamortization of the CLIMB technology of $347,000, $347,000, and $88,000 in2007, 2008, and 2009, respectively.

In June 2006, we entered into an agreement withWyeth to terminate the European distribution of Nipent by Wyeth and transitiondistribution to SuperGen (see Note 8 below). We paid Wyeth $2.1 million, whichwas recorded as Prepaid distribution and marketing rights, and are amortizingit as a reduction of product revenue over 10 months, which corresponds to thetermination acceleration period of June 2006 through March 2007.  Accumulated amortization was $1,470,000 at December 31,2006. We expect to record amortization of $630,000 in 2007.

**Thecarrying amount of intangible assets that are not considered to have anindefinite useful life is reviewed whenever events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable.Recoverability of these assets is measured by comparison of the carrying amountof the asset to the future undiscounted cash flows the asset is expected togenerate. If the asset is considered to be impaired, the amount of any impairmentis measured as the difference between the carrying value and the fair value ofthe impaired asset.**

**DerivativeFinancial Instruments**

We have issued warrantsfor common stock of another entity in connection with issuances of convertibledebt. These warrants are considered to be a derivative financial instrument inaccordance with Statement of Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments,” and are recorded at fair value. The changes in thefair value of the derivative financial instruments are recognized in currentearnings in each reporting period. The value of the derivative was zero at December 31,2006, because the warrants associated with the derivative expired on that date.

F-10

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**1.Summary of Significant Accounting Policies (Continued)**

**Major Customers**

Ourmajor customers include a number of buying groups. Some of these customersindividually comprise greater than 10% of our total product revenue and/orgreater than 10% of our trade accounts receivable balances, as follows:

| ** ** | ** ** | **Percentage of product  revenue by customer for  Years ended December 31,** | ** ** | **Percentage  of accounts  receivable by  customer as of  December 31,** | ** ** |
|------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                                                                                             | ** ** | **2005**                                                                                          | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Customer A |       |                                                                                                                 | 29         | %                                                                                                 |       |   | 19 | % |   |   | * |   |   |   | * |   |   |   | * |   |   |
| Customer B |       |                                                                                                                 | 11         |                                                                                              |       |   | * |   |   |   | * |   |   |   | * |   |   |   | * |   |   |
| Customer C |       |                                                                                                                 | 10         |                                                                                              |       |   | 14 |   |   |   | * |   |   |   | * |   |   |   | * |   |   |
| Customer D |       |                                                                                                                 | *          |                                                                                              |       |   | 28 |   |   |   | 27 | % |   |   | 10 | % |   |   | 34 | % |   |
| Customer E |       |                                                                                                                 | *          |                                                                                              |       |   | * |   |   |   | 21 |   |   |   | * |   |   |   | * |   |   |
| Customer F |       |                                                                                                                 | *          |                                                                                              |       |   | * |   |   |   | 12 |   |   |   | 62 |   |   |   | * |   |   |
| Customer G |       |                                                                                                                 | *          |                                                                                              |       |   | 11 |   |   |   | * |   |   |   | * |   |   |   | * |   |   |

----

*                    Lessthan 10%

**Net Loss per CommonShare**

Basic and diluted net loss per common share iscomputed by dividing net loss by the weighted average number of sharesoutstanding during the year.

As wehave reported operating losses each period since our inception, the effect ofassuming the exercise of options and warrants and assumed conversion ofconvertible debt would be anti-dilutive and, therefore, basic and dilutedloss per share are the same. The computation of diluted net loss per share forthe three years ended December 31 excluded the following (in thousands):

| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Options to  purchase common stock  |       | 6,615    |       | 6,550    |       | 6,502    |       |
| Warrants to purchase  common stock |       | 5,059    |       | 6,924    |       | 7,183    |       |

 

**Impairment ofLong-lived Assets**

We evaluate long-lived assets, other than goodwill,for impairment whenever events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable based on expectedundiscounted cash flows attributable to that asset. The amount of anyimpairment is measured as the difference between the carrying value and thefair value of the impaired asset. No impairment existed as of December 31,2006.

F-11

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**1. Summary of Significant Accounting Policies (Continued)**

**Cumulative Effect Adjustment for UK Tax Liability UponAdoption of SAB**108**

Duringthe third quarter of 2006 a previously unrecorded United Kingdom (“UK”) payrollrelated liability was identified. We estimated this liability aggregated$966,000, related to withholding and other personal income tax, penalties andinterest involving a former SuperGen employee who was a United States citizenand worked in the UK. The liability originated during the years 2002 – 2006 andwas identified as a result of disclosures made by a UK employee to ourauditors. We determined that $795,000 of the liability related to periods priorto 2006. The following table illustrates the amount of the error thatoriginated in each of the years between 2002 and 2005 (in thousands):

| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net loss, as  reported          |       | $                                          | (14,482    | ) | $ | (46,860 | ) | $ | (53,470 | ) | $ | (49,471 | ) |
| Amount of  understatement       |       | (181                                       | )          | (308 | ) | (205 | ) | (101 | ) |
| Error as a percent of  net loss |       | 1.2                                        | %          | 0.7 | % | 0.4 | % | 0.2 | % |
|                                 |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

Weadopted the provisions of Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements”**(“SAB 108”) inSeptember 2006. Prior to the adoption of SAB 108, we quantifiedmisstatements based on the amount of the error originating in the current yearstatement of operations (“rollover approach”). SAB 108 requires that inaddition to considering the amount of the error originating in the current yearstatement of operations, the misstatement existing at each balance sheet dateshould also be considered, irrespective of the period of origin of the error(“iron curtain approach”). We do not believe that any of the amounts included inthe table above are material to the periods in which they originated using therollover approach. However, using the iron curtain method upon adoption of SAB108, we have determined that the quantitative cumulative error aggregatingapproximately $795,000 that existed as of December 31, 2005 is material tothe 2005 financial statements. As permitted when first applying the guidance inSAB 108, prior periods were not restated. The cumulative effect of the initialapplication of SAB 108 for quantification and correction of the error isincluded in the accumulated deficit as of December 31, 2006 in theaccompanying balance sheet. The impact of this cumulative effect adjustment isan increase to accrued payroll and employee benefits of $795,000 and an increaseto accumulated deficit of $795,000 as of January 1, 2006. The followingtable illustrates the effect of the cumulative effect adjustment recorded as ofJanuary 1, 2006 (in thousands):

| ** **                                              | ** ** | **Accrued payroll   and employee   benefits** | ** ** | **Accumulated   deficit** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------|------------|
| Balance as of  December 31, 2005, as reported      |       |                                                              | $          | 2,269                          |       |   |   | $ | (348,010 | ) |   |
| Cumulative effect  adjustment for adoption of   SAB 108 |       |                                                              | 795        |                           |       |   | (795 | ) |   |
| Balance as of  January 1, 2006, as adjusted        |       |                                                              | $          | 3,064                          |       |   |   | $ | (348,805 | ) |   |

 

We paid the $966,000 taxliability in December 2006. Of the $171,000 expense that originated during2006, $135,000 is included in selling, general and administrative expense and$36,000 is included in the foreign currency transaction adjustment for the yearended December 31, 2006.

F-12

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**1.Summary of Significant Accounting Policies (Continued)**

**Recent AccountingPronouncements**

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation ofStatement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes.”  FIN  48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in an enterprise’s tax return.This interpretation also provides guidance on the derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition of tax positions. The recognition threshold and measurementattribute is part of a two step tax position evaluation process prescribed inFIN 48. FIN 48 is effective after the beginning of an entity’s first fiscalyear that begins after December 15, 2006. We are currently evaluating theimpact of FIN 48 to our consolidated financial statements.

In September 2006,the FASB issued Statement of Financial Accounting Standards (“SFAS”)No. 157, Fair Value Measurements. SFAS No. 157 defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements. This statement clarifies how to measure fair value aspermitted under other accounting pronouncements but does not require any newfair value measurements. However, for some entities, the application of this statementwill change current practice. We will be required to adopt SFAS No. 157 asof January 1, 2008. We are currently evaluating the impact of SFASNo. 157 and have not yet determined the effect on our earnings orfinancial position.

**2. Available-for-Sale-Securities**

The following is a summary of available-for-salesecurities (in thousands):

| ** **                      | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| **At December 31, 2006**   |       |                |       |                         |       |                          |       |                |       |   |   |   |   |   |   |   |   |
| U.S. corporate  debt securities |       |                | $          | 64,023                       |       |                          |       | $                   | 9          |   |   |   | $ | (1 | ) |   |   | $ | 64,031 |   |   |
| Marketable equity  securities   |       |                | 5,846      |                         |       |                          | 1,917      |                |       |   | (2 | ) |   |   | 7,761 |   |   |
| Total                           |       |                | $          | 69,869                       |       |                          |       | $                   | 1,926      |   |   |   | $ | (3 | ) |   |   | $ | 71,792 |   |   |
| **At  December 31, 2005**  |       |                |       |                         |       |                          |       |                |       |   |   |   |   |   |   |   |   |
| U.S. corporate  debt securities |       |                | $          | 44,681                       |       |                          |       | $                   | 9          |   |   |   | $ | — |   |   |   | $ | 44,690 |   |   |
| Marketable equity  securities   |       |                | 6,566      |                         |       |                          | 2,841      |                |       |   | — |   |   |   | 9,407 |   |   |
| Total                           |       |                | $          | 51,247                       |       |                          |       | $                   | 2,850      |   |   |   | $ | — |   |   |   | $ | 54,097 |   |   |

 

F-13

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2. Available-for-Sale-Securities (Continued)**

**The available-for-sale securities are classified on thebalance sheet as follows (in thousands):**

| ** **                                                  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| **At December 31, 2006**                               |       |                |       |                         |       |                          |       |                |       |   |   |   |   |   |   |   |   |
| Amounts included in cash and cash equivalents               |       |                | $          | 64,023                       |       |                          |       | $                   | 9          |   |   |   | $ | (1 | ) |   |   | $ | 64,031 |   |   |
| Amounts included in investment in stock of related  parties |       |                | 120        |                         |       |                          | 39         |                |       |   | — |   |   |   | 159 |   |   |
| Amounts included in restricted cash and Investments         |       |                | 5,602      |                         |       |                          | 1,821      |                |       |   | — |   |   |   | 7,423 |   |   |
| Marketable securities, non-current                          |       |                | 124        |                         |       |                          | 57         |                |       |   | (2 | ) |   |   | 179 |   |   |
| Total                                                       |       |                | $          | 69,869                       |       |                          |       | $                   | 1,926      |   |   |   | $ | (3 | ) |   |   | $ | 71,792 |   |   |
| **At December 31, 2005**                               |       |                |       |                         |       |                          |       |                |       |   |   |   |   |   |   |   |   |
| Amounts included in cash and cash equivalents               |       |                | $          | 44,681                       |       |                          |       | $                   | 9          |   |   |   | $ | — |   |   |   | $ | 44,690 |   |   |
| Amounts included in investment in stock of related  parties |       |                | 120        |                         |       |                          | 52         |                |       |   | — |   |   |   | 172 |   |   |
| Amounts included in restricted cash and investments         |       |                | 6,322      |                         |       |                          | 2,766      |                |       |   | — |   |   |   | 9,088 |   |   |
| Marketable securities, non-current                          |       |                | 124        |                         |       |                          | 23         |                |       |   | — |   |   |   | 147 |   |   |
| Total                                                       |       |                | $          | 51,247                       |       |                          |       | $                   | 2,850      |   |   |   | $ | — |   |   |   | $ | 54,097 |   |   |

 

Available-for-salesecurities at December 31, by contractual maturity, are shown below (inthousands):

| ** **                               | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|
| ** **                               | ** ** | **2006**            | ** ** | **2005** | ** ** |
| Debt securities  due in one year or less |       | $                   | 64,031     |   | $ | 44,690 |   |
| Marketable equity  securities            |       | 7,761               |       | 9,407 |   |
| Total                                    |       | $                   | 71,792     |   | $ | 54,097 |   |

 

Realized gains and losses on the sale ofavailable-for-sale securities for the years ended December 31, 2006, 2005,and 2004 were not material.

During the year endedDecember 31, 2005, we recorded a write-down of $11,000 related to theother than temporary decline in the value of our equity investment in InflazymePharmaceuticals. During the year ended December 31, 2004, we recorded awrite-down of $7,851,000 related to other than temporary decline in the valueof our equity investment in AVI. We had no such write-downs in 2006.

**3. Stockholders’Equity**

**Private Placement**

On March 5, 2004, weentered into a Securities Purchase Agreement with several investors for theprivate placement of shares of unregistered common stock and warrants. Inconnection with this agreement, we issued 4,900,000 shares of our common stockto the investors at a per share price of $7.00, for an aggregate purchaseamount of $34,300,000, and warrants to purchase 735,000 shares of our commonstock. The warrants have a term of five years and a per share exercise price of$10.00. As compensation to the placement agent, we paid the placement agent$1,735,000 in cash, which was treated as part of the cost of the offering. Netproceeds from the offering were $32,525,000.

F-14

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**3.Stockholders’ Equity (Continued)**

The common stock andwarrants we issued in the private placement transaction were initiallyunregistered. We filed a registration statement on Form S-3 with theSEC on March 23, 2004 to register the shares issued in the privateplacement as well as the shares to be issued upon exercise of the warrants. Inaccordance with EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” thewarrants were included as a liability and valued at fair market value until wemet the criteria under EITF 00-19 for permanent equity. We valued thewarrants at $3,307,000 on March 5, 2004 using the Black-Scholes methodwith the following assumptions:  arisk-free interest rate of 2.81%, volatility of 0.89, and a dividend yield of0%. The registration statement on Form S-3 was declared effective bythe SEC on March 31, 2004. We re-valued the warrants on that date at$6,923,000 using the Black-Scholes method with the following assumptions: arisk-free interest rate of 2.81%, volatility of 0.89, and a dividend yield of0%.  The warrants were then transferredto permanent equity, and the change in the value of the warrant liabilitybetween March 5, 2004 and March 31, 2004, or $3,616,000, was chargedto Change in valuation of derivatives in the accompanying statement ofoperations during the year ended December 31, 2004. We had no similarcharges in the years ended December 31, 2006 or 2005.

**Warrants**

AtDecember 31, 2006, warrants to purchase the following shares of our commonstock were outstanding:

| ** ** | **Number of   Shares** | ** ** | ** ** | **Exercise  Price** | ** ** | **Issue  Date** | ** ** | **Expiration  Date** | ** ** |
|------------|----------------------------------|------------|------------|---------------------|------------|-----------------|------------|----------------------|------------|
|       | 551,419                          |       |       | $                   | 4.00-6.00  |            | 2003       |                 |       | 2007 |   |   |
|       | 1,997,500                        |       |       | 5.00                |       | 2003            |       |                 | 2008       |   |   |
|       | 1,135,000                        |       |       | 10.00               |       | 2004            |       |                 | 2009       |   |   |
|       | 230,000                          |       |       | 10.35               |       | 1997            |       |                 | 2007       |   |   |
|       | 100,000                          |       |       | 10.47               |       | 2003            |       |                 | 2007       |   |   |
|       | 1,045,000                        |       |       | 13.50               |       | 1997            |       |                 | 2007       |   |   |
|       | 5,058,919                        |       |       |                |       |            |       |                 |       |   |   |
|            |                                  |            |            |                     |            |                 |            |                      |            |  |  |  |

 

**Stock Reserved forFuture Issuance**

AtDecember 31, 2006, we have reserved shares of common stock for futureissuance as follows:

| Stock options  outstanding                         |   | 6,615,153  |   |
|----------------------------------------------------|--------|------------|--------|
| Stock options available  for grant                 |   | 2,569,188  |   |
| Warrants to purchase  common stock                 |   | 5,058,919  |   |
| Shares available for  Employee Stock Purchase Plan |   | 82,214     |   |
|                                               |   | 14,325,474 |   |

 

**4. Stock BasedCompensation**

Effective January 1, 2006, we adopted the fairvalue recognition provisions of Statement of Financial Accounting StandardsNo. 123(R), “Share-Based Payment”(“SFAS 123R”), using the modified-prospective-transition method. Under thistransition method, compensation cost recognized for the year 

F-15

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**4. StockBased Compensation (Continued)**

ended December 31,2006 includes: (a) compensation cost for all stock-based payments granted,but not yet vested as of January 1, 2006, based on the grant-date fairvalue estimated in accordance with the original provisions of Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”), and(b) compensation cost for all stock-based payments granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated in accordancewith the provisions of SFAS 123R. Such amounts have been reduced by ourestimate of forfeitures of all unvested awards. Results for prior periods havenot been restated.

*Stock Option Plans.*We have 12,263,000 shares of common stock authorizedfor issuance upon the grant of incentive stock options or nonstatutory stockoptions to employees, directors, and consultants under our stock option plans,including our 2003 Stock Plan and 1996 Directors’ Stock Option Plan. The numberof shares to be purchased, their price, and the terms of payment are determinedby our Board of Directors, provided that the exercise price for incentive stockoptions cannot be less than the fair market value on the date of grant. Theoptions granted generally expire ten years after the date of grant and becomeexercisable at such times and under such conditions as determined by the Boardof Directors (generally over a four or five year period).

*Employee Stock PurchasePlan.* We also have anemployee stock purchase plan (“ESPP”) that allows eligible employees topurchase common stock at a price per share equal to 85% of the lower of thefair market value of the common stock at the beginning or end of each six monthperiod during the term of the ESPP. The current offering period beganNovember 15, 2006 and is scheduled to end on May 14, 2007. UnderAccounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” (“APB 25”), we werenot required to recognize stock-based compensation expense for the cost ofstock options or shares issued under the Company’s ESPP. Upon adoption of SFAS123R, we began recording stock-based compensation expense related to the ESPP.

As a result of the January 1, 2006 adoption ofSFAS 123R, we recognized $3,344,000 in stock based compensation expense for theyear ended December 31, 2006. As a result of this adoption, our basic anddiluted net loss per common share for the year ended December 31, 2006 arelower by $0.06.

The fair value of eachstock award is estimated on the grant date using the Black-Scholesoption-pricing model based on the assumptions noted in the following table:

| ** **               | ** ** | **Year ended December 31** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free interest  rate |       | 4.74                                      | %          | 4.19 | % | 2.21 | % |
| Dividend yield           |       | —                                    |       | — |   | — |   |
| Expected volatility      |       | 0.660                                     |       | 0.814 |   | 0.804 |   |
| Expected life (in years) |       | 5.18                                      |       | 5.00 |   | 5.00 |   |

 

Upon the adoption of SFAS 123R in 2006, we changed ourmethod of computing expected volatility to include a blend of historicalvolatility and implied volatility of our common stock based on the period oftime corresponding to the expected life of the stock options. We could not relyexclusively on implied volatility because options on SuperGen stock withremaining terms of greater than one year are not regularly traded in themarket. In prior years, we calculated the fair value of stock awards using onlyhistorical volatility dating back to 1996. The expected life of stock optionsgranted is based exclusively on historical data and represents the weightedaverage period of time that stock options granted are expected 

F-16

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**4. StockBased Compensation (Continued)**

to be outstanding. Theexpected life is applied to one group as a whole as we do not expectsubstantially different exercise or post-vesting termination behavior among ouremployee population. The risk-free interest rate is based on the U.S. Treasuryyield curve in effect at the time of grant commensurate with the expected lifeassumption.

We are using the straight-line attribution method torecognize stock-based compensation expense. The amount of stock-basedcompensation recognized during a period is based on the value of the portion ofthe awards that are ultimately expected to vest. SFAS 123R requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. The term“forfeitures” is distinct from “cancellations” or “expirations” and representsonly the unvested portion of the surrendered option. We have applied an annualforfeiture rate of 12.02% to all unvested options as of December 31, 2006.This analysis will be re-evaluated quarterly and the forfeiture rate will beadjusted as necessary. Ultimately, the actual expense recognized over thevesting period will only be for those shares that vest.

A summary of the Company’sstock option activity as of December 31, 2006, is presented below:

| ** **                                            | ** ** | **Options   Outstanding** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Weighted   Average   Remaining   Contractual   Term** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Balance at  January 1, 2004                      |       |                           | 5,326,349  |                                                     |       |                                                                        | $          | 9.34                                        |       |   |   |   |   |   |   |   |
| Granted at fair value                                 |       |                           | 1,861,050  |                                                     |       |                                                                        | 9.85       |                                        |       |   |   |   |   |   |   |
| Exercised                                             |       |                           | (325,801   | )                                                        |       |                                                                        | 4.30       |                                        |       |   |   |   |   |   |   |
| Forfeited                                             |       |                           | (359,546   | )                                                        |       |                                                                        | 11.07      |                                        |       |   |   |   |   |   |   |
| Balance at  December 31, 2004                    |       |                           | 6,502,052  |                                                     |       |                                                                        | 9.64       |                                        |       |   |   |   |   |   |   |
| Granted at fair value                                 |       |                           | 868,650    |                                                     |       |                                                                        | 5.46       |                                        |       |   |   |   |   |   |   |
| Exercised                                             |       |                           | (273,080   | )                                                        |       |                                                                        | 3.38       |                                        |       |   |   |   |   |   |   |
| Forfeited                                             |       |                           | (547,897   | )                                                        |       |                                                                        | 12.90      |                                        |       |   |   |   |   |   |   |
| Balance at  December 31, 2005                    |       |                           | 6,549,725  |                                                     |       |                                                                        | 9.07       |                                        |       |   |   |   |   |   |   |
| Granted                                               |       |                           | 993,089    |                                                     |       |                                                                        | 4.92       |                                        |       |   |   |   |   |   |   |
| Exercised                                             |       |                           | (129,760   | )                                                        |       |                                                                        | 4.69       |                                        |       |   |   |   |   |   |   |
| Forfeited                                             |       |                           | (165,187   | )                                                        |       |                                                                        | 5.94       |                                        |       |   |   |   |   |   |   |
| Expired                                               |       |                           | (632,714   | )                                                        |       |                                                                        | 7.64       |                                        |       |   |   |   |   |   |   |
| Balance at  December 31, 2006                    |       |                           | 6,615,153  |                                                     |       |                                                                        | $          | 8.75                                        |       |   |   | 5.62 |   |   | $ | 2,237,326 |   |
| Vested or expected to  vest at December 31, 2006 |       |                           | 6,316,871  |                                                     |       |                                                                        | $          | 8.78                                        |       |   |   | 5.53 |   |   | $ | 2,205,872 |   |
| Exercisable at December 31, 2006                 |       |                           | 5,385,361  |                                                     |       |                                                                        | $          | 8.92                                        |       |   |   | 5.21 |   |   | $ | 2,084,484 |   |

 

The weighted-average grant-date fair value of optionsgranted during the year ended December 31, 2006 was $2.91. The totalintrinsic value of options exercised (i.e. the difference between the marketprice at exercise and the price paid to exercise the options) during the yearended December 31, 2006 was $59,000 and the total amount of cash receivedfrom exercise of these options was $608,000.

F-17

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**4. StockBased Compensation (Continued)**

As of December 31, 2006, there was $3,260,000 oftotal unrecognized compensation cost related to unvested stock-based awards.This cost is expected to be recognized over a weighted average period of 2.69years. We expect approximately 932,000 in unvested options to vest at somepoint in the future. Options expected to vest is calculated by applying anestimated forfeiture rate to the unvested options.

Thefollowing table illustrates the effect on net loss and net loss per share hadwe applied the fair value recognition provisions of SFAS 123R in the yearsended December 31, 2005 and 2004. For purposes of this pro-formadisclosure, the value of the options is estimated using a Black-Scholesoption-pricing model and amortized to expense over the options’ vesting periods(in thousands, except per share amounts):

| ** **                                                                                                                                                                  | ** ** | **Year Ended December 31,**                                       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **      2005      ** | ** ** | **      2004      ** | ** ** |
| ** **                                                                                                                                                                  | ** ** | **(Revised)**                                                                    | ** ** |
| Net loss, as  reported                                                                                                                                                      |       |                                                                             | $          | (14,482 | ) |   |   | $ | (46,860 | ) |   |
| Add: Stock-based  employee compensation expense included in the determination of net loss, as  reported                                                                     |       |                                                                             | 268        |   |   |   | 654 |   |   |
| Deduct:  Stock-based employee compensation expense that would have been included in  the determination of net loss if the fair value method had been applied to  all awards |       |                                                                             | (6,116     | ) |   |   | (9,044 | ) |   |
| Pro forma net  loss                                                                                                                                                         |       |                                                                             | $          | (20,330 | ) |   |   | $ | (55,250 | ) |   |
| Basic and diluted net  loss per common share:                                                                                                                               |       |                                                                             |       |   |   |   |   |   |   |
| As reported                                                                                                                                                                 |       |                                                                             | $          | (0.28 | ) |   |   | $ | (1.04 | ) |   |
| Pro forma                                                                                                                                                                   |       |                                                                             | $          | (0.40 | ) |   |   | $ | (1.23 | ) |   |

 

During the preparation of the notes to the condensedconsolidated financial statements for the quarter ended March 31, 2006, wedetermined that the calculation of our pro-forma net loss reported under SFAS123 for the year ended December 31, 2005, as previously reported, wasunderstated as a result of our having inadvertently excluded the fair value of(and, therefore, the compensation expense related to) options granted tomembers of our Board of Directors during 2005 and 2004. Accordingly, pro-formaexpense was understated by $398,000 and $778,000 for the years endedDecember 31, 2005 and 2004, respectively. This revision had no effect onour previously reported consolidated results of operations or financialcondition.

Duringthe years ended December 31, 2005 and 2004, we recorded non cashcharges of $268,000 and  $654,000,respectively for stock compensation related to the modification andacceleration of options associated with the change in status or departure ofcertain Company management.

**5. License and StockPurchase Agreements with MGI PHARMA, Inc.**

In August 2004, we entered into three agreementswith MGI PHARMA, Inc., a Minnesota corporation (“MGI”):  (1) a license agreement relating toDacogenTM (decitabine), (2) a common stock purchase agreement, and(3) an investor rights agreement. The agreements became effective on September 21, 2004. Dacogen isan investigational anti-cancer therapeutic which was recently approved by theUnited States Food Drug Administration (“FDA”) for the treatment of patientswith myelodysplastic syndrome (“MDS”).

F-18

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**5.License and Stock Purchase Agreements with MGI PHARMA, Inc. (Continued)**

Pursuant to the terms of the license agreement, MGIreceived exclusive worldwide rights to the development, commercialization anddistribution of Dacogen for all indications. We will receive 20% to 30% inroyalties from MGI on all sales of licensed product worldwide. The licenseagreement will expire, on a country-by-country and licensed product-by-licensedproduct basis on the later to occur of (a) twenty years after the firstcommercial sale of the applicable licensed product in the respective country or(b) the expiration, termination, invalidation or abandonment of the patentrights covering the respective licensed product, or the manufacture or usethereof, in the respective country. Either we or MGI may terminate the licenseagreement for the non-payment by the other of any payment obligations under theagreement, or for any uncured material breach of the agreement. In addition, wehave the right to terminate the agreement if (i) MGI is acquired by anentity that is not deemed an “equivalent” pharmaceutical company or(ii) MGI becomes insolvent. None of the payments made pursuant to theagreement are refundable, except in the case of overpayment.

In accordance with the stock purchase agreement, weissued 4,000,000 shares of our common stock to MGI at $10.00 per share, foraggregate proceeds totaling $40,000,000. We paid the placement agent $3,200,000in cash and issued the placement agent a warrant exercisable for 400,000 sharesof our common stock at an exercise price of $10.00 per share. We calculated thefair value of the warrant at $1,436,000. We allocated the aggregate proceedsand related costs of the placement agent fee and warrant valuation betweenequity, for the portion attributable to the stock purchase agreement, anddeferred revenue, for the portion attributable to the license agreement.Therefore, we allocated $23,662,000, the fair value of 4,000,000 shares of ourcommon stock at the time of the transaction, net of related offering costs, toequity, and allocated $12,625,000 to deferred revenue. The deferred revenue wasamortized to license revenue over 15 months, which was the period of time inwhich our development obligations for Dacogen transferred to MGI. During theyears ended December 31, 2005 and 2004, we recorded amortization ofdeferred revenue of $9,905,000 and $2,720,000, respectively. The deferredrevenue was fully amortized at December 31, 2005, so we had noamortization in 2006.

Under the terms of the license agreement, MGI wasobligated to reimburse us for certain development and allocated overhead costsof Dacogen until we received marketing authorization. During the years endedDecember 31, 2006, 2005, and 2004 we recognized $93,000, $3,448,000 and$3,646,000, respectively of development revenue relating to the reimbursementunder this agreement.

In May 2006, the FDA approved Dacogen for thetreatment of patients with MDS and MGI commenced commercial sales of Dacogen inthe United States. In accordance with our license agreement with MGI, wereceived a milestone payment of $20.0 million in the second quarter of 2006.MGI is required to pay us royalties of 20% to 30% of net Dacogen sales within45 days after the end of each calendar quarter. During the year endedDecember 31, 2006, we recorded royalty revenue of $3,427,000. We recognizeroyalty revenue on a cash basis when we receive it from MGI because we do nothave sufficient ability to accurately estimate Dacogen sales.

In July 2006, MGIexecuted an agreement to sublicense Dacogen to Cilag GmbH, a Johnson &Johnson company (also known as Janssen-Cilag), granting exclusive developmentand commercialization rights in all territories outside North America. Inaccordance with our license agreement with MGI, we are entitled to receive 50%of any payments MGI receives as a result of any sublicenses. We received $5.0million, 50% of the $10 million upfront payment MGI received, and, as a resultof both the original agreement with MGI and this sublicense with Cilag GmbH,may receive up to $23.75 million in future 

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**5.License and Stock Purchase Agreements with MGI PHARMA, Inc. (Continued)**

milestonepayments as they are achieved for Dacogen sales globally. Janssen-Cilagcompanies will be responsible for conducting regulatory and commercialactivities related to Dacogen in all territories outside North America, whileMGI retains all commercialization rights and responsibility for all activitiesin the United States, Canada and Mexico.

**6. AcquisitionOf Montigen Pharmaceuticals, Inc.**

On April 4, 2006, we completed our acquisition ofMontigen, a privately-held oncology-focused drug discovery and developmentcompany headquartered in Salt Lake City, Utah. Montigen’s assets include itsresearch and development team, a proprietary drug discovery technology platformand optimization process, CLIMB, and late-stage pre-clinical compoundstargeting aurora-A kinase and members of the tyrosine kinase receptor family.

Pursuant to the terms of the agreement, we paid theMontigen stockholders a total of $17.9 million upon the closing of thetransaction in cash and shares of SuperGen common stock. We will pay theMontigen stockholders an additional $22.0 million in shares of SuperGen commonstock, contingent upon achievement of specific regulatory milestones. Wereceived a permit from the Commissioner of Corporations for the State ofCalifornia so that the issuance of the shares of SuperGen common stock areexempt from registration under the Securities Act of 1933.

The acquisition of Montigen has been accounted for asan acquisition of assets rather than as a business combination in accordancewith the criteria outlined in Emerging Issues Task Force 98-3. Montigenwas a development stage company that was focused on developing a business andhad not commenced its principal business operations. It also lacked thenecessary elements of a business because it did not have completed products.The results of operations of Montigen since April 4, 2006 have beenincluded in our consolidated financial statements and primarily consist ofresearch and development expenses.

Theaggregate purchase price of Montigen was $18,127,000, which included cash paidof $8,988,000, the issuance of 1,625,626 shares of SuperGen common stock valuedat $8,948,000 in total, and $191,000 in direct transaction costs. The purchaseprice was allocated on April 4, 2006 as follows (in thousands):

| Net tangible assets                           |   | $      | 532    |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Assembled  workforce                          |   | 235    |   |
| CLIMB Technology  Platform                    |   | 1,042  |   |
| Acquired in-process  research and development |   | 16,318 |   |
| Total                                         |   | $      | 18,127 |   |

 

The $532,000 of net tangible assets included $486,000in cash, prepaids and other current assets of $37,000, $405,000 of fixedassets, and $396,000 of assumed liabilities. The values assigned to assembledworkforce and CLIMB technology platform are being amortized over three years,the estimated useful lives of the assets.

The value assigned to acquired in-process research anddevelopment represented the fair value of Montigen’s incomplete research anddevelopment programs that had not yet reached technological 

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**6.Acquisition Of Montigen Pharmaceuticals, Inc. (Continued)**

feasibility and had noalternative future use as of the acquisition date. A summary of these compoundsis as follows (in thousands):

| ** **                                              | ** ** | **Adjusted  Fair Value** | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|
| Compound 1 (MP-470)—Tyrosine  Kinase inhibitor     |       |                          | $          | 1,091 |   |   |
| Compound 2 (MP-529/235)—Aurora-A  Kinase inhibitor |       |                          | 15,227     |   |   |
| Total Acquired  in-process research and development     |       |                          | $          | 16,318 |   |   |

The value of the acquiredin-process research and development was determined by estimating the future netcash flows for the two compounds between 2006 and 2029 using a present valuerisk adjusted discount rate of 26%. This discount rate is a significantassumption and is based on our estimated weighted average cost of capitaladjusted upward for the risks associated with the projects acquired. Theprojected cash flows from the acquired projects were based on estimates ofrevenues and operating profits related to the projects considering the stage ofdevelopment of each potential product acquired, the time and resources neededto complete the development and approval of each product, the life of eachpotential commercialized product and associated risks including the inherentdifficulties and uncertainties in developing a drug compound, includingobtaining FDA and other regulatory approvals, and risks related to theviability of and potential alternative treatments in any future target markets.The entire value of acquired in-process research and development of $16,318,000was charged to expense in 2006. The $22.0 million in future contingentregulatory milestone payments due to the Montigen stockholders will be recordedas additional acquired in-process research and development expense when paid.

**7. Asset AcquisitionAgreement With Mayne Pharma**

**North AmericanAsset Acquisition Agreement**

OnAugust 22, 2006, we executed an Asset Acquisition Agreement with MaynePharma (USA), Inc. (“Mayne”), pursuant to which Mayne acquired the NorthAmerican rights to Nipent and SurfaceSafe® cleaning system. We received cashproceeds of $13,395,000 upon closing of the transaction, which represented thepurchase price per the agreement, reduced by a number of adjustments andholdbacks, as follows (in thousands):

| Purchase price  per agreement |                          | $      | 21,095 |   |
|-------------------------------|-------------------------------|--------|--------|--------|
| Less:                         | Mitomycin  reduction          |   | (1,140 | )      |
|                          | Supply holdback               |   | (5,000 | )      |
|                          | Indemnification  holdback     |   | (1,000 | )      |
|                          | Net asset  adjustment         |   | (445   | )      |
|                          | Channel inventory  adjustment |   | (115   | )      |
| Initial cash proceeds         |                          | $      | 13,395 |   |

 

The mitomycin reduction represents a reduction in theproposed purchase price for the mitomycin product line that was originally tobe sold as part of the transaction but was removed during the finalnegotiations. The supply holdback is being held by Mayne until we complete thequalification and deliver an FDA approved manufacturer of Nipent. Theindemnification holdback will be held by Mayne for 18 months to cover anypotential claims. The net asset adjustment reflects the difference in value ofthe net 

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**7. AssetAcquisition Agreement With Mayne Pharma (Continued)**

assets acquired in theagreement from the initial negotiation date to the final closing date. Thechannel inventory adjustment represents the difference between the value ofinventory in the supply chain at the negotiation date and the final closingdate.

In addition to the initial payment and holdbacks, wemay receive annual deferred payments totaling $14,140,000 over the next fiveyears based on achievement of specific annual sales targets by Mayne. A portionof these annual deferred payments could be accelerated under certaincircumstances, including a change of control at Mayne. Such a change of controloccurred in February 2007 as Mayne was acquired by Hospira, and wereceived $10,312,000 of the deferred payments.

In conjunction with the Asset Acquisition Agreementwith Mayne, we also entered into certain related agreements including thefollowing:

*Transition ServicesAgreement—**We*have agreed to provide certaintransition services to Mayne. This includes utilization of our sales andmarketing personnel during a six month transition period, for which we arebeing reimbursed by Mayne. In addition, Mayne has agreed to provide certaintransition services, without charge related to supporting approval of aspecified manufacturer of Nipent in Europe. During the year endedDecember 31, 2006, we have billed $2,064,000 for services provided toMayne, which has been recorded as a reduction of our selling, general andadministrative operating expenses.

*Supply Agreement—**To*support ourEuropean business, Mayne will provide us with a supply of Nipent indefinitelyor until our sale of the European business to Mayne is finalized. During theyear ended December 31, 2006, we purchased $503,500 of Nipent from Mayne.The portion of this purchase that represented the amount in excess over ouroriginal cost of Nipent, or $401,000, has been recorded as a reduction of thedeferred gain.

We have a number of additional obligations under theAsset Acquisition Agreement, including the following:

*Reimbursement of Costs forAlternate Supply—**We*are obligated to reimburse Mayneup to $1 million for transferring manufacturing and purification capabilitiesrelated to crude pentostatin from the existing manufacturer to Mayne’sspecified facility. During the year ended December 31, 2006, we recorded$171,000 for alternate supply cost reimbursements.

*Development Plan Payments*—We are obligated to pay all remaining amounts due under a validationand supply agreement for qualification of a Nipent manufacturing facility. Thisprovision relates directly to the $5 million supply holdback noted above.During the year ended December 31, 2006, we incurred $500,000 of costsrelated to this obligation, which have been charged to research anddevelopment.

*Price Protection*—Weare obligated to reimburse Mayne for three years for amounts paid to a newsupplier of Nipent in excess of the amounts referenced in the Supply Agreementnoted above. Contract negotiations have not been completed on the new supplyagreement and we believe there remains uncertainty around the amount of theprice protection exposure. We expect that Mayne and the new supplier will havecompleted negotiations by the first quarter of 2007. Once the supply agreementis negotiated we anticipate that we will have an appropriate basis to assesswhether, and to 

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**7. AssetAcquisition Agreement With Mayne Pharma (Continued)**

what extent, any price protection exposure exists, which will impactwhen we recognize the net gain on sale for this transaction.

*Retention and Severance Costs*—We are obligated to pay all retention and severance costs foremployees that continue to perform services under the Transition ServicesAgreement. Since our employees are required to stay with the company andperform transition related services before they can collect their retention andseverance, we will accrue the retention and severance costs as they are earned.During the year ended December 31, 2006, we recorded $1,639,000 of earnedand accrued retention and severance costs, which are recorded in selling,general and administrative expenses. During the year ended December 31,2006, $901,000 of these costs were paid in cash, resulting in a remainingbalance of $738,000 at December 31, 2006, which is included in accruedpayroll and employee benefits. We expect total retention and severance costs tobe approximately $2.0 million at the end of the transition services period.

From the initial cash proceeds from the agreement of$13,395,000, we deducted the value of net assets delivered to Mayne, includinginventory, prepaid expenses, and manufacturing equipment, as well as the costsrelated to the alternative supply reimbursements and the gross margin on vialsrepurchased from Mayne for supply to Europe, and computed a remaining net gainof $11,754,000. However, due to the uncertainty regarding the price protectionexposure noted above, we have deferred the entire net gain as ofDecember 31, 2006.

Due to the Company’scontinuing involvement with the Nipent operations, resulting from entering intothe related agreements and the additional obligations as described above, theCompany has reflected activities related to the Nipent and Surface Safebusinesses in operating activities for all periods presented.

**Worldwide AssetAcquisition Agreement**

On November 25, 2006,we entered into an Asset Acquisition Agreement with Mayne, pursuant to whichMayne would acquire the remaining worldwide rights to Nipent for a totalconsideration of $8 million, including approximately $3.75 million upon the closingof the transaction. The balance of the purchase price includes $1.25 million ofpayments contingent on key events and the remaining $3 million is payable overa five-year period on the anniversary of the closing date. The transaction hasbeen approved by both companies’ board of directors, and is subject tocustomary closing conditions and regulatory approval. The transaction isexpected to close in the first quarter of 2007.

**8. Nipent Marketing AndDistribution Rights**

**Termination ofAgreements with Abbott Laboratories**

In December 1999, we entered into a Nipent distribution agreement with AbbottLaboratories (“Abbott”). BeginningMarch 1, 2000, Abbott became the exclusive U.S. distributor of Nipent fora period of five years. We retained U.S. marketing rights for Nipent. Underthis agreement, Abbott made a $5 million cash payment to the Company inJanuary 2000. This amount was included in deferred revenue and was beingamortized to distribution revenue ratably over 60 months throughDecember 2002.

In March 2003, weentered into an agreement with Abbott that allowed us to terminate the Nipentdistribution agreement, for a stated fee that decreased over time to $1,500,000at March 2005. As part of the agreement, we paid Abbott $500,000 for thisright to terminate the Nipent distribution agreement at 

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**8. NipentMarketing And Distribution Rights (Continued)**

ouroption. The $500,000 was recorded as a reduction of the deferred revenue weinitially received from Abbott for the distribution rights and we stoppedamortizing the remaining balance of deferred revenue, which was $1,667,000 atthat time. In February 2005, weexercised our option and paid Abbott $1,500,000 to terminate the Nipentdistribution agreement. This amount was charged against deferred revenue. Theremaining balance in deferred revenue of $167,000 was recorded as distributionagreement revenue in the year ended December 31, 2005. We had no similarrevenue in the years ended December 31, 2006 or 2004.

**Pfizer MarketingRights**

In February 2004, weentered into a Purchase and Sale Agreement with Pfizer Inc. to acquire Europeanmarketing rights for Nipent, our drug that is currently approved for marketingin the United States for hairy cell leukemia. We paid Pfizer $1,000,000 underthis agreement and have classified this amount in Prepaid distribution andmarketing rights in the accompanying balance sheet. This amount was amortizedover 31 months, the estimated life of the benefit period, to cost of productrevenue. During the years ended December 31, 2006 and 2005, we recordedamortization of $290,000 and $387,000, respectively. Accumulated amortizationwas $710,000 at December 31, 2005, and the amount was fully amortized atDecember 31, 2006.

**Wyeth DistributionRights**

On June 1, 2006, we entered into an agreementwith Wyeth to terminate the European distribution of Nipent by Wyeth andtransition distribution to SuperGen. In connection with the execution of theamended agreement, we paid Wyeth $2.1 million in consideration for theacceleration of the transfer of the Nipent European distribution rights and thenet profit amounts to be paid by Wyeth as described below. Distribution rightsunder the amended agreement were expected to transition for most countries nolater than December 1, 2006. The original distribution and supplyagreement with Wyeth would have terminated on its own terms at no cost toSuperGen over a period of time, varying by country, through March 2007.

During the transition period, we continued to shipvials of Nipent to Wyeth for sale and distribution in various countries inEurope. On a monthly basis, Wyeth has remitted to SuperGen an additionalamount, defined in the amended and restated supply agreement as the “netprofit,” based on Wyeth’s sales of Nipent. The net profit has been computed asWyeth’s invoiced net sales, less the product acquisition cost from SuperGen,less 5% transfer fee (based on product cost) and less 5% distribution fee(based on net revenue). Recurring remittances to SuperGen may be adjusted byany Wyeth invoiced trade receivable that is overdue by 60 days or more. At thetime distribution rights transfer, we will be required to repurchase any unsoldinventory held by Wyeth with a shelf life greater than 12 months and limitedamounts of packaging materials.

We recorded the initial $2.1 million payment to Wyethas Prepaid distribution and marketing rights, and are amortizing it as areduction of product revenue over 10 months, which corresponds to thetermination acceleration period of June 2006 through March 2007.  Accumulated amortization was $1,470,000 atDecember 31, 2006.

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**8. NipentMarketing And Distribution Rights (Continued)**

Revenue related to our twoproduct shipments in May and September 2006 to Wyeth totaling$1,007,000 was initially deferred. We recognized the revenue, and related costof revenue, as these vials were delivered to end customers by Wyeth.  During the year ended December 31, 2006,we recognized $332,000 of such revenue for vials sold by Wyeth, since webelieve that Wyeth’s ability to collect from the end customer is reasonablyassured. At the time distribution rights are transferred in the first quarterof 2007, we expect that any remaining deferred revenue from distributorshipments will approximate SuperGen’s obligation to repurchase unsold inventoryfrom Wyeth. During the year ended December 31, 2006, we also received$1,535,000 of net profit from Wyeth, which was included in net product revenue.

**9. Acquisition andTransfer Agreements**

**DaunorubicinTransfer Agreement**

We received approval of anAbbreviated New Drug Application (“ANDA”) for generic daunorubicin in 2001. InApril 2005, we executed a transfer agreement with American PharmaceuticalPartners, Inc. whereby we transferred the ANDA and all rights, title, andinterest in the product for $590,000. We recorded this amount as other revenue duringthe year ended December 31, 2005.

**PeregrinePharmaceuticals—VEGF License**

In February 2001, we completed a transaction tolicense a platform drug-targeting technology known as Vascular Targeting Agentfrom Peregrine Pharmaceuticals (“Peregrine”), formerly known as TechnicloneCorp. The licensed technology is specifically related to Vascular EndothelialGrowth Factor (“VEGF”). The agreement required an up-front payment of $600,000,which included the acquisition of 150,000 shares of Peregrine. These shares arecarried as part of Marketable Securities—non-current.

The terms of the agreement require that we paymilestone payments and royalties to Peregrine based on the net revenues of anydrugs commercialized using the VEGF technology. These payments could ultimatelytotal $8 million. No milestone or royalty payments have been made under theagreement to date. In addition, we are required to pay Peregrine an annuallicense fee until the first filing of an Investigational New Drug Application(“IND”) utilizing the licensed patents. During the years endedDecember 31, 2006 and 2005, we paid Peregrine license fees of $100,000 and$200,000, respectively, in cash in connection with this agreement. During theyear ended December 31, 2004, we paid an annual license fee of $200,000 toPeregrine with 18,454 unregistered shares of our common stock, which wascalculated based on the average price of our common stock during the 30-dayperiod preceding the payment date. The annual license fees paid to Peregrinehave been charged to Research and development expense.

In August 2006, wesublicensed the VEGF technology to Targa Therapeutics Corp. (“Targa”). Inconnection with this sublicense, Targa has agreed to develop and commercializethe VEGF technology and will pay us an annual payment equal to the annuallicense fee due to Peregrine under our original license agreement. In addition,upon the achievement of milestones under the original license agreement, Targahas agreed to reimburse us an amount equal to such milestone payments. Targahas also agreed to reimburse us for royalties due to Peregrine on licensedproduct sales, provided that Peregrine reduced the royalty rates in writing. InFebruary 2007, we amended our license agreement with Peregrine to reducethese royalty rates.

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**9. Acquisitionand Transfer Agreements (Continued)**

**Clayton Foundationfor Research—Inhaled Drugs**

In December 1999, we entered into a licensing andresearch agreement with the Clayton Foundation for Research and its technologytransfer organization, Research Development Foundation. Under the terms of thelicensing agreement, we acquired worldwide rights to inhaled versions offormulations of camptothecins, including OrathecinTM.

During the years endedDecember 31, 2004, we recorded $100,000 in connection with the researchagreement, which we charged to Research and development expense. InApril 2005, we terminated the licensing and research agreement with theClayton and Research Development Foundations. We did not record any expenses inthe years ended December 31, 2006 or 2005 in connection with thisagreement, and we have no further obligations under this agreement.

**Stehlin Foundation—Orathecin**

In September 1997, we acquired exclusiveworldwide rights to a patented anticancer compound, Orathecin, from the StehlinFoundation for Cancer Research (“Stehlin”). We agreed to make monthly cashpayments to Stehlin until the earlier of the date of FDA marketing approval ofOrathecin or four years. Our agreement with Stehlin also called for additionalpayments in SuperGen common stock upon the achievement of specified milestonesand royalties on any product sales.

In November 1999, weamended our agreement with Stehlin to broaden the definition of licensedcompounds to include certain analogues of Orathecin. Under this amendment, weare required to seek commercial applications for Orathecin. Under the originalagreement and amendment, we were required to pay Stehlin approximately $9.6million for research and must make cash royalty payments and cash or stockmilestone payments to Stehlin as we develop and commercialize Orathecin. Inaccordance with these agreements, we have paid Stehlin all of the $9.6 millionrequired for research.  During the yearended December 31, 2004, we filed a New Drug Application (“NDA”) forOrathecin with the FDA. This triggered a required milestone payment to Stehlinof $500,000. We made the milestone payment through the issuance of 63,969shares of unregistered common stock, which was calculated based on the averagetrading price of our stock during the 30-day period preceding the paymentdate. There were no payments to Stehlin during the years endedDecember 31, 2006 or 2005.

**10. Convertible DebtFinancing Transactions**

In February 2003 we entered into a SecuritiesPurchase Agreement for the private placement of Senior Exchangeable ConvertibleNotes (“February Notes”) in the principal amount of $21.25 million andrelated warrants. The February Notes accrued interest at a rate of 4% peryear. The principal amount of the February Notes was repayable in fourequal quarterly installments beginning nine months after the closing of thetransaction. The February Notes were, at the option of the investors, inwhole or in part, (a) convertible into shares of our common stock at afixed conversion price of $4.25 per share, and (b) exchangeable for up to2,634,211 shares of common stock of AVI that we own (the “AVI Shares”) at afixed exchange price of $5.00 per share.

In June 2003, we closed a private placementtransaction in which we issued Senior Convertible Notes (“June Notes”) inthe aggregate principal amount of $21.25 million, to the same holders of ouroutstanding February Notes. The June Notes were payable in four equalquarterly installments which began March 31, 

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**10.Convertible Debt Financing Transactions (Continued)**

2004, and accrued interestat a rate of 4% per year. Pursuant to the terms of the June Notes, thenote holders could elect to convert, at any time prior to maturity, theirJune Notes into shares of our common stock at a fixed price $6.36, whichwas calculated based on the trading prices of our common stock for the twentytrading days after issuance of the June Notes.

Concurrent with the issuance of the June Notes,we restructured our outstanding February Notes.  Pursuant to the restructuring, the holders ofthe February Notes converted half of the principal amount into shares ofour common stock at the fixed conversion price of $4.25, thereby causing theremaining $10,625,000 principal amount of the outstanding February Notesto have a final maturity date of February 26, 2004. The remainingFebruary Notes were amended to remove the feature permitting the holdersto exchange such notes into the AVI Shares at an exchange price of $5.00, andto remove our ability to use the AVI Shares valued at market at the time ofrepayment to repay the outstanding principal amount. However, in connectionwith this issuance of the June Notes and the restructuring of theFebruary Notes, we issued to the note holders warrants to purchase the2,634,211 AVI Shares at an exercise price of $5.00 per share. The warrantsrepresented a derivative under SFAS 133 that must be recorded at fair value.Changes in the fair value of the derivative are recognized in earnings. Duringyears ended December 31, 2006, 2005, and 2004, we recorded changes in thevalue of this derivative of $1,817,000, $(211,000), and $3,898,000,respectively.

During the year ended December 31, 2006, one ofthe warrant holders exercised 300,000 warrants. As part of this transaction, wereceived $1,500,000 in cash and transferred 300,000 of the AVI Shares to thewarrant holder.  We recognized a gain ondisposition of the shares of $780,000, representing the difference between ourcarrying value of the shares and the proceeds we received. The warrants toacquire the AVI Shares for $5.00 per share expired on December 31, 2006.

In connection with the issuance of the warrants toacquire the AVI Shares, we pledged the AVI Shares into a collateral account.The fair value of the AVI Shares is included in the accompanying consolidatedbalance sheet under non-current Restricted cash and investments.  We also hold an additional 50,000 shares ofAVI, which are included in the accompanying balance sheets in Investment instock of related parties. We continue to hold all of the remaining pledged andunpledged AVI Shares and reflect temporary changes in those share values inaccumulated other comprehensive loss. During 2004 we recorded a write-down of$7,851,000 related to an other than temporary decline in the value of ourinvestment in AVI. We had no such write downs in 2005 or 2006.

In connection with the February andJune convertible note transactions, we recorded prepaid financing costsrelated to the placement agent fees, legal fees, and other cost associated withthe transactions. During the year ended December 31, 2004, we recordedamortization of the prepaid financing costs totaling $1,811,000 to interest expense.All prepaid financing costs had been fully amortized at December 31, 2004,and no expenses were recorded during the years ended December 31, 2005 and2006.

Also in connection withthe February and June convertible note transactions, we recordeddeemed discounts on the convertible debt. During the year endedDecember 31, 2004, we recorded amortization of the deemed discount onconvertible debt of $12,657,000. The deemed discount on convertible debt wasfully amortized at December 31, 2004, and no expenses were recorded duringthe years ended December 31, 2005 and 2006.

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11. Related PartyTransactions**

**EuroGenPharmaceuticals Ltd.**

In September 2001, weentered into a Supply and Distribution Agreement with EuroGen, a companyincorporated and registered in England and Wales. Under the agreement, wegranted EuroGen the exclusive European and South African rights to promote andsell certain of our existing generic and other products or compounds. Theagreement also establishes a process for granting EuroGen rights to selladditional products in Europe and South Africa, subject to our compliance withour other existing licensing and distribution arrangements. After complyingwith these existing obligations, we will be required to offer EuroGen theoption to obtain European and South African rights to our future products.EuroGen will seek and pay for all necessary regulatory approvals andauthorizations necessary for the commercial sale of the products in theterritories where they market and sell the products. In December 2002, webecame 95% owners of EuroGen. The remaining 5% is owned by the former Presidentand CEO of EuroGen.  The results ofEuroGen are included in our consolidated operations.

**KineMed, Inc.**

In November 2001, we made an equity investment of$150,000 to acquire 100,000 shares of Series A Convertible Preferred stockof KineMed, Inc. (“KineMed”), a start-up biotech company. InMarch 2003, we made an additional equity investment of $30,000 to acquirean additional 15,000 shares. The president and chief executive officer ofKineMed is a former director of SuperGen. Our current president and chiefexecutive officer is a member of the board of directors of KineMed. Weaccounted for this investment under the cost method as our ownership was lessthan 20% of KineMed’s outstanding shares. During 2005, we determined that thevalue of this investment was impaired due to the uncertain viability of KineMedas a going concern. As a result, the entire cost of the investment of $180,000was charged to Selling, general, and administrative expense in 2005.

In late 2004, we reachedan agreement with KineMed whereby we granted them exclusive worldwide rights tothe development, manufacture, commercialization and distribution of proprietaryproperty we own relating to etiocholoandeione and etiocholanolone compounds.Under the terms of the license agreement and upon successful commercialization,we could earn future royalty revenue on worldwide sales. In addition, we havetermination rights and rights of first refusal on new oncological uses.

**AVIBioPharma, Inc.**

In December 1999, we entered into an agreementwith AVI BioPharma, Inc.  At thetime, the chief executive officer of AVI was a member of our Board ofDirectors.  He later resigned from ourBoard in May 2002. The former president and chief executive officer ofSuperGen was a member of the Board of Directors of AVI through March 2004.Under the terms of the agreement, we acquired one million shares of AVI commonstock, which amounted to approximately 7.5% of AVI’s outstanding common stock,for $2.5 million cash and 100,000 shares of our common stock at $28.25 pershare. We also acquired exclusive negotiating rights for the United Statesmarket for Avicine, AVI’s proprietary cancer vaccine currently in late-stageclinical testing against a variety of solid tumors. Avicine is a non-toxic immunotherapy that neutralizes the effect of atumor-associated antigen on cancer cells, while stimulating the body’s immunesystem to react against the foreign tumor.

In July 2000, we finalized an agreement with AVIto obtain the U.S. marketing rights for Avicine. We issued 347,826 shares ofour common stock along with $5 million in cash to AVI as payment for our 

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11.Related Party Transactions (Continued)**

investment, in exchangefor 1,684,211 shares of AVI common stock. As part of this agreement, weobtained the right of first discussion to all of AVI’s oncology compounds andan option to acquire up to 1,665,478 shares of AVI’s common stock, subject toanti-dilution provisions, for $35.625 per share. This option is exercisable fora three-year period commencing on the earlier of the date the FDA accepts theNDA submitted for Avicine or the date on which the closing price of AVI’scommon stock exceeds the option exercise price. We have accounted for theinvestment in AVI under the cost method as our ownership is less than 20% ofAVI’s outstanding shares and is classified as available-for-sale. No value hasbeen ascribed to the option as neither of the measurements have been achievedas of December 31, 2006.

Avicine will requiresignificant additional expenditures to complete the clinical developmentnecessary to gain marketing approval from the FDA and equivalent foreignregulatory agencies. As part of this agreement, we are obligated to makeadditional payments to AVI based on successful achievement of developmental,regulatory approval, and commercialization milestones over the next severalyears that could total $80 million. In 2003 and 2002, we recorded $144,000 and$421,000, respectively, in research and development expenses for Avicine. AtDecember 31, 2006 and 2005, the sum of these expenses, or $565,000, wasstill payable and is presented on the balance sheet as Payable to AVIBioPharma, Inc.

**QuarkBiotech, Inc.**

Our current president andchief executive officer is a former director and our former president and chiefexecutive officer is currently a director and both are stockholders of QuarkBiotech, Inc. (“QBI”), a privately-held development stage biotechnologycompany. In June 1997, we made an equity investment of $500,000 in QBI’spreferred stock, which represents less than 1% of the company’s outstandingshares as of December 31, 2001. Our investment in QBI is carried at costand is included in “Investment in stock of related parties.”

**Other**

At December 31, 2006, we owned 10% of a privately-heldcompany performing research and development work almost exclusively forSuperGen as well as selling SuperGen certain research supplies. The presidentof this company and our former president and chief executive officer and boardmember through 2004 are currently partners in a new business enterprise. Wepaid this company $150,000 in 2004 for services and supplies. There were nopayments to this company in 2005 or 2006. Wecarry our investment in this company at no value.

At December 31, 2006and 2005, we have $31,000, and $52,000, respectively, in receivables due fromrelated parties. The receivables consist of advances or loans to employees.

**12. Commitments andContingencies**

We lease our primary administrative facility under a10 year non-cancellable operating lease, which may be renewed for an additionalfive-year period. The terms of the lease require us to establish and maintaintwo irrevocable and unconditional letters of credit to secure our obligationsunder the lease. The financial institution issuing the letters of creditrequires us to collateralize our potential obligations under the lease byassigning to the institution approximately $2.6 million in certificates ofdeposit. The certificates of deposit are included in the balance sheet underRestricted cash and investments. Upon 

F-29

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**12.Commitments and Contingencies (Continued)**

achievement of certainmilestones and the passage of time, the amounts of the letters of credit aresubject to reduction or elimination.

We were also leasing additional office space in abuilding adjacent to our laboratory facility under two leases which bothterminated in June 2006. Both spaces were subleased under non-cancellableleases which terminated at the same time as the master lease.

Futureminimum rentals under all operating leases with terms greater than one year areas follows (in thousands): 

| ** **                                  | ** ** | **Minimum  rental  obligations** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| **Year ending December 31,** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| 2007                                        |       |                             | $          | 2,266 |   |   |
| 2008                                        |       |                             | 2,304      |   |   |
| 2009                                        |       |                             | 2,348      |   |   |
| 2010                                        |       |                             | 2,166      |   |   |
| 2011 and  thereafter                        |       |                             | —     |   |   |
|                                        |       |                             | $          | 9,084 |   |   |
|                                             |            |                                  |            |  |  |  |  |  |

 

Rent expense was $2,077,000 in 2006, $2,014,000 in2005, and $2,034,000 in 2004. These amounts were net of sublease income of$146,000 in 2006, $326,000 in 2005, and $323,000 in 2004.

As noted in Note 6 above, wewill pay the Montigen stockholders an additional $22.0 million in shares ofSuperGen common stock, contingent upon achievement of specific regulatorymilestones.

We have entered into technology license agreementsallowing us access to certain technologies. These agreements generally requireroyalty payments based upon the sale of approved products incorporating thetechnology under license. No sales of such products have occurred as ofDecember 31, 2006.

We have also entered intomanufacturing and service agreements for certain manufacturing services, thesupply of research materials and the performance of specified research studies.These agreements require payments based upon the performance of themanufacturing entity, delivery of the research materials or the completion ofthe studies. No such payments were required as of December 31, 2006.

**13. Income Taxes**

Forfinancial reporting purposes, our net loss included the following components(in thousands):

| ** **    | ** ** | **Year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Pre-tax Loss: |       |                                       |       |   |   |   |   |
| United States |       | $                                          | (14,396    | ) | $ | (11,312 | ) | $ | (44,591 | ) |
| Foreign       |       | (1,516                                     | )          | (3,170 | ) | (2,269 | ) |
|          |       | $                                          | (15,912    | ) | $ | (14,482 | ) | $ | (46,860 | ) |

 

F-30

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13. Income Taxes(Continued)**

Incometax expense for the year ended December 31, 2006 consisted of thefollowing components (in thousands):

| Current:                          |   |   |   |
|-----------------------------------|--------|--------|--------|
| Federal                           |   | $      | 427    |   |
| State                             |   | 148    |   |
| Total current                     |   | 575    |   |
| Deferred                          |   | — |   |
| Total provision for  income taxes |   | $      | 575    |   |

 

No income tax expense was recorded for the years endedDecember 31, 2005 and 2004.

Thedifference between the income tax benefit and the amount computed by applyingthe federal statutory income tax rate to loss from continuing operations beforeincome taxes for the year ended December 31, 2006 is as follows (inthousands):

| Income tax  benefit at federal statutory rate |   | $     | (5,535 | )      |
|-----------------------------------------------|--------|-------|--------|--------|
| State taxes (net  of Federal)                 |   | 516   |   |
| Unbenefitted  foreign losses                  |   | 531   |   |
| In-process  research and development          |   | 5,711 |   |
| Non-deductible  deferred compensation         |   | 423   |   |
| Credits                                       |   | (920  | )      |
| Other                                         |   | 65    |   |
| Change in  valuation allowance                |   | (216  | )      |
| Total                                         |   | $     | 575    |   |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. Significant components of our deferredtax assets are as follows (in thousands):

| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Deferred Tax Assets:                          |       |                  |       |   |   |
| Net operating loss carryforwards              |       | $                     | 108,533    |   | $ | 112,547 |   |
| Purchased in-process technology               |       | 4,583                 |       | 5,761 |   |
| Research and development credit carryforwards |       | 13,398                |       | 9,619 |   |
| Capitalized research and development          |       | 4,572                 |       | 6,123 |   |
| Investments                                   |       | 6,013                 |       | 9,290 |   |
| Deferred revenue                              |       | 4,712                 |       | — |   |
| Other                                         |       | 3,528                 |       | 1,686 |   |
|                                          |       | 145,339               |       | 145,026 |   |
| Valuation allowance                           |       | (145,339              | )          | (145,026 | ) |
| Net Deferred Tax Assets                       |       | $                     | —     |   | $ | — |   |

 

F-31

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.Income Taxes (Continued)**

Realization of deferred tax assets is dependent uponfuture earnings, if any, the timing and amount of which are uncertain.Accordingly, the net deferred tax assets have been fully offset by a valuationallowance. The valuation allowance increased by $313,000 during 2006,$6,964,000 during 2005, and by $23,200,000 during 2004. Approximately$7,230,000 of the valuation allowance for deferred tax assets relates to excesstax benefits of stock option deductions that, when recognized, will beallocated directly to additional paid-in capital.

As of December 31, 2006 we have net operatingloss carryforwards for federal income tax purposes of approximately$288,954,000 which expire in the years 2011 through 2026, and federal researchand development credit carryforwards of approximately $8,030,000, which expirein the years 2008 through 2026.

As of December 31, 2006, we also have netoperating loss carryforwards for state income tax purposes of approximately$139,960,000, which expire in various years through 2026, research anddevelopment tax credits of approximately $7,595,000, which do not expire, andCalifornia manufacturer’s investment credit of approximately $4,500, whichexpires in the year 2007.

Utilization of our netoperating loss carryforwards may be subject to substantial annual limitationsdue to ownership change limitations provided by the Internal Revenue Code andsimilar state provisions. Such an annual limitation could result in theexpiration of the net operating losses before utilization.

**14. Employee Benefit Plans**

**401(k) ProfitSharing Plan**

We have adopted a401(k) Profit Sharing Plan (the “401(k) Plan”) for all eligibleemployees with a minimum of two months of service. We may be obligated to makecontributions to the plan to comply with statutory requirements. Voluntaryemployee contributions to the 401(k) Plan may be matched by the Company,up to 3% of each participant’s annual compensation. Our expense relating tocontributions made to employee accounts under the 401(k) Plan wasapproximately $206,000 in 2006, $212,000 in 2005, and $222,000 in 2004.

**Employee StockPurchase Plan**

In 1998 we established the 1998 Employee StockPurchase Plan (“ESPP”), and a total of 500,000 shares of Common Stock arereserved for issuance under the plan. Employees participating in the ESPP aregranted the right to purchase shares of common stock at a price per share thatis the lower of 85% of the fair market value of a share of Common Stock on thefirst day of an offering period, or 85% of the fair market value of a share ofCommon Stock on the last day of that offering period.

In 2006, we issued 21,938and 23,101 shares through the ESPP at $3.93 and $3.77, respectively. In 2005,we issued 26,980 and 24,580 shares through the ESPP at $3.98 and $3.95,respectively. In 2004, we issued 31,685 and 29,372 shares through the ESPP at$6.15 and $5.00, respectively. As of December 31, 2006, 82,214 shares arereserved for future issuance under the ESPP.

F-32

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**SUPERGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**15. Quarterly FinancialData (Unaudited)**

Followingis a summary of the quarterly results of operations for the years endedDecember 31, 2006 and 2005:

| ** **                                       | ** ** | **Quarter Ended**                                                          | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **March 31**                                                               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                                       | ** ** | **(Amounts in thousands, except per share data)** | ** ** |
| **2006**                                         | ** ** | ** **                                                                      | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net product  revenue                             |       | $                                                                               | 2,884      |   | $ | 3,984 |   |   | $ | 2,228 |   |   |   | $ | 467 |   |   |
| Cost of product  revenue                         |       | 548                                                                             |       | 847 |   |   | 482 |   |   |   | 126 |   |   |
| Net income (loss)                                |       | (12,188                                                                         | )          | 4,343 |   |   | (2,318 | ) |   |   | (6,323 | ) |   |
| Basic and diluted  net income (loss)   per share |       | (0.24                                                                           | )          | 0.08 |   |   | (0.04 | ) |   |   | (0.11 | ) |   |
| **2005**                                         | ** ** | ** **                                                                      | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net product  revenue                             |       | $                                                                               | 1,015      |   | $ | 3,625 |   |   | $ | 5,457 |   |   |   | $ | 5,963 |   |   |
| Cost of product  revenue                         |       | 300                                                                             |       | 700 |   |   | 736 |   |   |   | 1,315 |   |   |
| Net loss                                         |       | (6,903                                                                          | )          | (1,888 | ) |   | (2,078 | ) |   |   | (3,613 | ) |   |
| Basic and diluted net  loss per share            |       | (0.13                                                                           | )          | (0.04 | ) |   | (0.04 | ) |   |   | (0.07 | ) |   |

 

F-33

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized, onthis 16th day of March 2007.

|        | SUPERGEN, INC. |
|--------|---------------------|
|   | By:                 | /S/ JAMES S. J. MANUSO |
|   |                | James S.J. Manuso |
|   | * *            | *Chief  Executive Officer, President and Director* |

 

**POWER OF ATTORNEY**

We, the undersigned officers and directors of SuperGen, Inc.hereby constitute and appoint James S.J. Manuso and Michael Molkentin, and eachof them individually, our true and lawful attorney-in-fact, with full power ofsubstitution, to sign for us and in our names in the capacities indicated belowany amendments to this Report on Form 10-K, and to file the same,with exhibits thereto and other documents in connection therewith, with theSecurities and Exchange Commission, hereby ratifying and confirming all thatsaid attorney-in-fact, or their substitute or substitutes, may door cause to be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report on Form 10-Khas been signed below by the following persons on behalf of the Registrant andin the capacities and on the dates indicated:

|                         | **Signature** | ** **                                       | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------|---------------|--------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /S/ JAMES S.J. MANUSO   |          | Chief Executive Officer,  President and Director |       | March 16,  2007 |
| (James  S.J. Manuso)    |          | (Principal Executive  Officer)                   |       |                 |
| /S/ MICHAEL MOLKENTIN   |          | Chief Financial  Officer                         |       | March 16,  2007 |
| (Michael  Molkentin)    |          | (Principal Financial and  Accounting Officer)    |       |                 |
| /S/ CHARLES CASAMENTO   |          | Director                                         |       | March 16,  2007 |
| (Charles  J. Casamento) |          |                                             |       |                 |
| /S/ THOMAS V. GIRARDI   |          | Director                                         |       | March 16,  2007 |
| (Thomas  V. Girardi)    |          |                                             |       |                 |
| /S/ ALLAN R. GOLDBERG   |          | Director                                         |       | March 16,  2007 |
| (Allan  R. Goldberg)    |          |                                             |       |                 |
| /S/ WALTER J. LACK      |          | Director                                         |       | March 16,  2007 |
| (Walter  J. Lack)       |          |                                             |       |                 |
| /S/ MICHAEL D. YOUNG    |          | Director                                         |       | March 16,  2007 |
| (Michael  D. Young)     |          |                                             |       |                 |

 

S-1

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