**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

FORM 10-K

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

**Forthe Fiscal Year Ended December 31, 2004**

**OR**

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

**Forthe transition period from                  to                  **

**Commissionfile number 0-27628**

----

SUPERGEN, INC.

(Exact name of registrantas specified in its charter)

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

 

Registrant’s telephonenumber, including area code: **(925) 560-0100**

----

Securities registered pursuantto Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act:

**Common Stock, $0.001 parvalue per share**

(Title of Class)

----

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.   Yes x  Noo

Indicate by check markwhether Registrant is an accelerated filer (as defined in Rule 12b-2of the Act). Yes x  Noo

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.  x

The aggregate market valueof the voting stock held by non-affiliates of the Registrant (based on theclosing sale price of the Common Stock as reported on the Nasdaq Stock Marketon June 30, 2004, the last business day of the Registrant’s most recentlycompleted second fiscal quarter) was approximately $279,172,873. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes. The number of outstanding shares of the Registrant’s CommonStock as of the close of business on March 4, 2005 was 51,142,214.

**DOCUMENTSINCORPORATED 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 May 12, 2005.

 

----

**SUPERGEN, INC.2004 ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS**
|               | ** ** | ** **                                                                                  | ** ** | ** ** | **Page**   | ** ** |
|---------------|------------|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|
| PART I   | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** |
| Item  1.      |       | Business                                                                                    |       | 1          |       |
| Item  2.      |       | Properties                                                                                  |       | 29         |       |
| Item  3.      |       | Legal Proceedings                                                                           |       | 29         |       |
| Item  4.      |       | Submission of Matters to a Vote of  Security Holders                                        |       | 29         |       |
| PART II  | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** |
| Item  5.      |       | Market for Registrant’s Common  Equity and Related Stockholder Matters                 |       | 30         |       |
| Item  6.      |       | Selected Financial Data                                                                     |       | 31         |       |
| Item  7.      |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |       | 32         |       |
| Item  7A.     |       | Quantitative and Qualitative  Disclosures About Market Risk                                 |       | 61         |       |
| Item  8.      |       | Financial Statements and  Supplementary Data                                                |       | 61         |       |
| Item  9.      |       | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure       |       | 61         |       |
| Item  9A.     |       | Controls and Procedures                                                                     |       | 61         |       |
| PART III | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** |
| Item 10.      |       | Directors and Executive  Officers of the Registrant                                         |       | 64         |       |
| Item 11.      |       | Executive Compensation                                                                      |       | 65         |       |
| Item 12.      |       | Security Ownership of  Certain Beneficial Owners and Management                             |       | 66         |       |
| Item 13.      |       | Certain Relationships and  Related Transactions                                             |       | 66         |       |
| Item 14.      |       | Principal Accountant Fees  and Services                                                     |       | 66         |       |
| PART IV  | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** |
| Item  15.     |       | Exhibits, Financial Statement  Schedules, and Reports on Form 8-K                      |       | 67         |       |
| SIGNATURES    |       | S-1                                                                                         |       |
|               |            |                                                                                             |            |            |            |            |  |

 

----

**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: the timing of receiving FDA approval of our NDA filing for Dacogen;the timing of receiving EMEA approval of our MAA filings for Orathecin andDacogen; our estimates about becoming profitable; our forecasts regarding ourresearch and development expenses; our expectation that EuroGen will generaterevenue by the end of 2005; and our statements regarding the sufficiency of ourcash to meet our operating needs. Our actual results could differ materiallyfrom those predicted in the forward-looking statements as a result ofrisks and uncertainties including, but not limited to, delays and risksassociated with conducting and managing our clinical trials; developingproducts and obtaining regulatory approval; ability to establish and maintaincollaboration relationships; competition; ability to obtain funding; ability toprotect our intellectual property; our dependence on third party suppliers;risks associated with the hiring and loss of key personnel; adverse changes inthe specific markets for our products; and ability to launch and commercializeour products. Certain unknown or immaterial risks and uncertainties canalso affect 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 the caption “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Factors Affecting Future Operating Results”in this report. These are currently known and material risks that we believecould cause our actual results to differ materially from expected andhistorical results. Other unknown and immaterial risks besides those listed inthis report could also adversely affect us.*

**PART I**

**ITEM1**. 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.

**Overview**

We are a pharmaceutical company dedicated to thedevelopment and commercialization of therapies for solid tumors, hematologicalmalignancies and blood disorders. Currently, we have three key compounds thatare the primary focus of our efforts: DacogenTM (decitabine) for injection,OrathecinTM (rubitecan) capsules and Nipent® (pentostatin for injection).

On January 26, 2004, we submitted a New DrugApplication (“NDA”), under accelerated approval procedures with the U.S. Foodand Drug Administration (“FDA”) for Orathecin for the treatment of pancreaticcancer patients that had failed one or more therapies. The filing was acceptedby the FDA and indicated a target Prescription Drug User Fee Act (“PDUFA”) dateof November 26, 2004. At the request of the FDA, during November 2004we submitted additional clinical data from a trial of Orathecin as a first-linetreatment for pancreatic cancer as well as new analyses of data from thepivotal study in 2nd and 

1

----

3rd line patients. The FDAclassified these data as a Major Amendment, which triggered an extension of thereview period by 90 days resulting in a revised target PDUFA date of February 26,2005. Based on further discussions and feedback with both the FDA andconsultants helping us dialog with the FDA, it was determined the currentpackage for Orathecin was not sufficient to gain approval at this time in theUnited States and we announced the withdrawal of the NDA in January 2005. Duringthe 2005 first quarter we received the findings from the FDA and will review thesefindings and determine the most appropriate course of action in the future forOrathecin in the United States.

During July 2004, we submitted a MarketingAuthorization Application (“MAA”) to the European Agency for the Evaluation ofMedicinal Products (“EMEA”) seeking approval of Orathecin. The MAA forOrathecin was submitted by our European subsidiary, EuroGen PharmaceuticalsLtd. (“EuroGen”) and will be reviewed under the EMEA Centralized Procedure,where marketing authorization is applied for in all 25 European Union (“EU”)Member States simultaneously. EMEA procedures generally provide that a decisionon the Orathecin MAA will usually occur within 12 months of acceptance of thesubmission. Our European filing for Orathecin remains on track and is notaffected by the withdrawal of our NDA for Orathecin in the United States.

During March 2004, we reported the results fromour randomized Phase III study of Dacogen as a treatment for myelodysplasticsyndromes (“MDS”). On November 1, 2004, we submitted an NDA with the FDAfor Dacogen. The filing was accepted by the FDA and indicated a target PDUFAdate of September 1, 2005. The acceptance for review of the NDA representsthe FDA’s determination that the application is sufficiently complete to permita substantive review.

On October 1, 2004, we submitted a MAA to theEMEA seeking approval of Dacogen. The MAA for Dacogen was submitted by EuroGenand will be reviewed under the EMEA Centralized Procedure, where marketingauthorization is applied for in all 25 EU Member States simultaneously. EMEAprocedures generally provide that a decision on the Dacogen MAA will usuallyoccur within 12 months of acceptance of the submission.

On September 1, 2004, we announced the signing ofa definitive agreement granting MGI PHARMA (“MGI”) exclusive worldwide rightsto the development, manufacture, commercialization and distribution of Dacogen.Under the terms of the agreement, MGI made a $40.0 million equity investment inus at $10.00 per share and will pay us up to $45.0 million upon achievement ofspecified regulatory and commercialization milestones. If Dacogen is approvedwe will receive a royalty on worldwide net sales starting at 20% and escalatingto a maximum of 30%. MGI has also committed to fund further development costsassociated with Dacogen at a minimum of $15.0 million over a three year period.The transaction closed on September 22, 2004.

Nipent is approved by theFDA and EMEA for the treatment of hairy cell leukemia and is marketed by us inthe United States and Europe. The European distribution is currently handled byWyeth Pharmaceuticals (“Wyeth”) under a distribution agreement. We havecompleted several Phase IV clinical trials, or post-marketing trials, andcontinue to conduct trials intended to expand Nipent’s potential use beyond thetreatment of patients with hairy cell leukemia to indications including chroniclymphocytic leukemia (“CLL”) non-Hodgkin’s lymphoma (“NHL”), and graft-versus-hostdisease (“GvHD”). We have commercialization rights for each of these compounds,and intend to market them directly in the United States through our salesforce, and either directly or indirectly in additional international markets.

**Strategy**

We commercialize products by pursuing a strategy ofidentifying and acquiring pharmaceutical compounds in the late stages ofdevelopment, which allows us to minimize the time, expense and technical riskassociated with drug research. Rather than engage in discovery research toobtain lead compounds, we license or acquire rights to compounds that haveshown initial efficacy in humans or in a model relevant to 

2

----

a particular disease atthe pre-clinical or early clinical stages of development. Our primary objectivein the pursuit of this strategy is to be a leading supplier and developer oftherapies for solid tumors, hematological malignancies and blood disorders. Keyelements of our strategy include:

*Expanding commercialization of our current products and launching eachnew product when****approved by the FDA or otherregulatory agencies such as the EMEA.  *We intend to focus significant resourcesassociated with enhancing commercialization efforts with our existing productsor the launch of new approved marketed products. As part of ourcommercialization efforts, we will or may be required to:

·        hireadditional sales, marketing and medical affairs personnel;

·        developand implement appropriate indigent support programs;

·        developand implement Phase IV clinical trials to explore additional combination andsingle agent uses for marketed products;

·        developand implement physician, pharmacist and nursing education programs to fullyunderstand the impact and advantages of treating cancer patients;

·        developand produce collateral material regarding the appropriate uses of marketeddrugs as Nipent or Orathecin (if approved); and

·        furtherdevelop and refine marketing plans with respect to all marketed drugs.

It is our intent to continue to increase our presencewithin the oncology marketplace through our commercialization initiatives, andwe believe such efforts will also benefit our existing product, Nipent, and newapproved products.

*Expanding our sales and market penetration of thetherapeutic anti-cancer market.  *We haveendeavored to establish a leadership position in the market of hematologicalproducts. This market exists within the overall anti-cancer market. Webelieve we are prudently expanding our sales and marketing organization in thehematology space and expanding our brand into solid tumors to supportcommercialization of our existing and any new products. This expansionprimarily entails increasing the number of direct sales representatives weemploy to call on oncologists and hematologists. The expansion also entailsadditional investment in marketing and branding initiatives to extend our namerecognition further into the therapeutic anti-cancer market.

*Globalizing our commercial presence.  *Webelieve that the global market opportunity for our products is meaningfullygreater than the market opportunity in the United States alone. Therefore, asmore of our products are approved for marketing in the United States, we intendto penetrate the worldwide market for anti-cancer products. The expansion ofour subsidiary, EuroGen, is the next step in this strategy, intended toultimately create a meaningful presence for our products in five majorcountries of the EU. EuroGen is primarily a registration, sales and marketingorganization. Previously, EuroGen has filed registration documentation to sellmitomycin and paclitaxel. During 2004, EuroGen filed registration documentationfor Orathecin and Dacogen and transferred the Nipent MAA from Pfizer to EuroGen.EuroGen is not expected to penetrate all European markets in the near future.The markets for anti-cancer products in the United Kingdom, Germany,France, Italy and Spain represent approximately 80 percent of the currentanti-cancer market in Western Europe. We expect EuroGen to generate revenue bythe end of 2005 from sales of one or more of our products. We intend topenetrate other areas outside of the United States through partners anddistributors.

*Capitalizing on our existing clinical expertise andregulatory development to maximize the commercial value of our products.  *Weintend to expand potential applications of our products both within existinglabeling for our products and through supporting physician-initiatedinterest in clinical trials in therapeutic areas beyond our products’ approvedindications. This expansion entails managing numerous additional 

3

----

clinical studies andregulatory interactions for our key products. This process is complex whetherit is conducted through our clinical department for formal label expansion orwhether the trials are supported and managed through our Medical Affairsdepartment. Over 20 physicians have initiated clinical studies with Nipent thatare currently being managed by our Medical Affairs department for a wide rangeof diseases. We believe companies are open to working with us because of ourcorporate expertise with the developmental, regulatory and marketing aspects ofmaximizing the value of products in this market segment. We believe ourclinical development experience serves to increase the value of our productportfolio.

*Licensing or buying rights tolater stage compounds.  *We identify and seek to licenseor buy rights to products or compounds that are in human clinical developmentor already marketed. We then seek to enhance and complete the productdevelopment. We believe that our approach minimizes the significant financialinvestment required by discovery research and reduces the risk of failure indeveloping a commercially viable product. Orathecin, Dacogen and Nipent wereeach acquired through this process. We believe our ability to navigate productsthrough clinical development, the FDA and other regulatory agencies makes us amore attractive partner for companies seeking to sell or license later stageproducts or compounds.

**Summary of Productsand Products 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 have demonstratedthat Dacogen can reverse the methylation of DNA, potentially leading tore-expression of genes and a resulting re-differentiation and maturation of thecancer cells back to pre-cancer levels. Researchers have also produced evidencethat Dacogen treatment may reverse drug resistance by restoring the sensitivityof tumors to treatment by drugs such as cisplatin.

*MyelodysplasticSyndromes*

MDS is a bone marrow disorder characterized by theproduction of abnormally functioning, immature blood cells. According to theAmerican Cancer Society, there are an estimated 10,000-20,000 new cases of MDSin the United States each year. In the majority of afflicted patients, MDSresults in death from bleeding and infection. In other patients, MDS cantransform to acute myelogenous leukemia (“AML”) a disease with a high mortalityrate.

In multiple Phase II studies in Europe, researchersdemonstrated that Dacogen is active and potentially efficacious for treatingpatients with MDS. Based on positive results from these European Phase IIstudies, we conducted a randomized Phase III study in the United States. ThisPhase III trial was designed to support regulatory approval of Dacogen for thetreatment of patients with MDS in the United States and Europe. During the AmericanSociety for Hematology meeting in December 2004, we reported results fromour randomized Phase III study of Dacogen for injection as a treatment for MDS.The study enrolled 170 patients at 22 North American sites, with 89 randomizedto Dacogen plus supportive care and 81 randomized to supportive care only. Supportivecare included antibiotics, growth factors and/or transfusions. The presentationincluded results from both primary endpoints of the study, response rate (CR +PR) per IWG MDS criteria as well as time to AML transformation or death.

Patients randomized to the Dacogen arm had asignificantly superior response rate compared to patients randomized to thebest supportive care arm, 17 % versus 0%, p < 0.001. Responses to Dacogen 

4

----

treatment were seen in allIPSS groups enrolled in the study. The median duration or response was 266 days.Dacogen responders versus all non-responders had a median of 491 versus 274AML-free days until death, a median of 657 versus 384 days of survival andremained or became RBC/platelet transfusion independent during response. Mediantime to AML transformation or death in all patients was 340 days for theDacogen arm versus 219 days for the best supportive care arm (p= 0.043Wilcoxon, 0.160 Log-rank). All analyses were specified by the protocol. Weand our clinical advisors believe that these data are clinically significantand these data were used to form the basis of our NDA and MAA for Dacogen.

More adverse events were reported for patientsrandomized to the Dacogen arm. Leucopenia and febrile neutropenia were observedmore frequently in patients given Dacogen, as were nausea, constipation,diarrhea, vomiting, pneumonia, arthralgia, headache and insomnia. Severeadverse events observed more frequently in patients randomized to Dacogen,categorized as Grade 3 or 4, were leucopenia and febrile neutropenia. The ratesof Grade 3-4 sepsis were similar (8 percent in the Dacogen arm versus 6 percentin the supportive care only arm). The mortality rate for patients on study is 12%for Dacogen and 9% for supportive care. This difference in mortality rates wasnot statistically significant.

Dacogen received orphan drug designation in the UnitedStates and Europe, which may provide us with seven years of marketingexclusivity in the United States and ten years marketing exclusivity in Europe,if Dacogen is approved by regulatory authorities for MDS. In addition, the FDAhas granted us “fast track” designation for Dacogen. However, the FDA approvalprocess may take a significant amount of time and Dacogen may not be approved.

On November 1, 2004, we submitted an NDA to theFDA for Dacogen. The submission was accepted for filing by the FDA andindicated a target PDUFA date of September 1, 2005. The acceptance forreview of the NDA represents the FDA’s determination that the application issufficiently complete to permit a substantive review.

On October 1, 2004, we submitted a MAA to theEMEA seeking approval of Dacogen. The MAA for Dacogen was submitted by EuroGen,and will be reviewed under the EMEA Centralized Procedure, where marketingauthorization is applied for in all 25 EU Member States simultaneously. EMEAprocedures generally provide that a decision on the Dacogen MAA will usuallyoccur within 12 months of acceptance of the submission.

On September 1, 2004,we announced the signing of a definitive agreement granting MGI exclusiveworldwide rights to the development, manufacture, commercialization anddistribution of Dacogen. Under the terms of the agreement, MGI made a $40.0 millionequity investment in us at $10.00 per share and will pay us up to $45.0 millionupon achievement of specified regulatory and commercialization milestones. IfDacogen is approved we will receive a royalty on worldwide net sales startingat 20% and escalating to a maximum of 30%. MGI has also committed to fundfurther development costs associated with Dacogen at a minimum of $15.0 millionover a three year period. The transaction closed on September 22, 2004.

***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 inhibitor thatcauses single-strand breaks in the DNA of rapidly dividing tumor cells.Based on our developmental program and clinical trial results, we believe thatOrathecin may have significant advantages over many existing anti-cancer drugs,including efficacy, side effect profile and oral dosing. In particular, webelieve that inhibition of bone marrow function is low, due in part toOrathecin’s dosing schedule, which provides for a cycle of five days ofadministration followed by two days of recovery. In clinical trials, theobserved side effects were mild to moderate hematological toxicities, low-gradecystitis, infrequent and mild hair loss and gastrointestinal disorders. As anoral drug that can be taken at home, we believe treatment with Orathecin wouldbe more convenient, may reduce overall healthcare costs, and may 

5

----

provide patients with animproved quality of life. We believe that Orathecin is a key drug that may beused in the treatment of a broad array of solid tumors and hematologicalmalignancies. Orathecin received orphan drug designation for pancreatic cancerin both the United States and Europe, which may provide us with seven years ofmarketing exclusivity in the United States and ten years of marketingexclusivity in Europe, if Orathecin is approved by regulatory authorities forthis disease. Similar marketing exclusivity is available in Japan.

On January 26, 2004, we submitted an NDA underaccelerated approval procedures to the FDA for Orathecin for the treatment ofpancreatic cancer patients that have failed one or more therapies. The filingwas accepted by the FDA and indicated a target PDUFA date of November 26,2004. At the request of the FDA, we submitted during November 2004additional clinical data from a trial of Orathecin as a first-line treatmentfor pancreatic cancer as well as new analyses of data from the pivotal study in2nd and 3rd line patients. The FDA classified these data as a Major Amendment,which triggered an extension of the review period by 90 days, resulting in arevised target PDUFA date of February 26, 2005. Based on furtherdiscussions and feedback with both the FDA and consultants helping us dialogwith the FDA, it was determined the current package for Orathecin was notsufficient to gain approval at this time in the United States and we announcedthe withdrawal of the NDA in January 2005. During the 2005 first quarterwe received the findings from the FDA and will review these findings anddetermine the most appropriate course of action in the future for Orathecin inthe United States.

During July 2004, wesubmitted a MAA to the EMEA seeking approval of Orathecin. The MAA forOrathecin was submitted by our European subsidiary, EuroGen, and will bereviewed under the EMEA Centralized Procedure, where marketing authorization isapplied for in all 25 EU Member States simultaneously. EMEA procedures generallyprovide that a decision on the Orathecin MAA will usually occur within 12months of acceptance of the submission. Our European filing for Orathecinremains on track and is not affected by the withdrawal of the NDA for Orathecinin the United States.

*Pancreatic Cancer*

Pancreatic cancer causes more than 75,000 deaths peryear globally. Based on a 1988-1992 study by the National Cancer Institute (“NCI”)pancreatic cancer accounts for only 2% of all newly diagnosed cancers in theUnited States each year, but results in 5% of all cancer deaths. The mostcommonly used therapies to treat pancreatic cancer include 5-FU andgemcitabine.

In May 2000, we presented data from a Phase IIstudy of Orathecin at a meeting of the American Society of Clinical Oncology. Thesedata support Orathecin’s efficacy in pancreatic cancer patients who had failedprevious chemotherapy. Of the 45 patients with measurable disease, 10%experienced either a reduction in the size of their tumor or diseasestabilization, meaning that the tumor did not grow. After starting Orathecintreatment, the median survival for these 10 patients was approximately 10months. Four of them survived more than 12 months and two survived morethan 24 months.

Todate, over 2,700 patients in our clinical studies have been treated withOrathecin. We believe that our Orathecin clinical program is the largestregulatory registration program ever undertaken in pancreatic cancer. In 1998,we commenced three stand-alone Phase III clinical trials with Orathecinfor treatment of advanced pancreatic cancer. The three studies are: “Gemcitabinerefractory,” where patients who failed treatment with gemcitabine wererandomized to either Orathecin or 5-FU; “Chemotherapy refractory,” wherepatients who failed multiple types of chemotherapy were randomized to eitherOrathecin or the physician’s best choice therapy; and “Chemotherapy naïve,”where patients who had no prior chemotherapy were randomized to Orathecin orgemcitabine. In the FDA’s summary basis of approval, the program sizes forgemcitabine and 5-FU, were as follows: gemcitabine had 126 patients infront-line use and 63 patients in second-line use, and 5-FU was approved ondata from 20 pancreatic cancer patients. 

6

----

The primary endpoint of these trials was survival. Thepatient populations for the Orathecin Phase III clinical studies are asfollows:
| **Protocol Description of Three Stand-Alone Phase III Studies** | ** ** | ** **         | ** ** | **Enrollment  Completed** | ** ** | **Patients  Enrolled** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------------|------------|------------------------|------------|
| Gemcitabine  refractory                                                                            |       | February 2001 |       |                      | 448        |                   |       |
| Chemotherapy  refractory                                                                           |       | June 2001     |       |                      | 409        |                   |       |
| Chemotherapy naïve                                                                            |       | October 2001  |       |                      | 994        |                   |       |

 

Given the large scale ofthe Orathecin clinical program and the inherent uncertainties associated withclinical trials of such magnitude and complexity, the data and statisticalanalysis from these trials may not support regulatory approval. For example,the design of these trials allowed patients who initially were being treatedwith gemcitabine or other therapies to cross over to treatment with Orathecin.At the time the trials were designed, we believed that the percentage ofpatients who would cross over for treatment with Orathecin would be in therange of 10% to 20% of the total enrolled patients. The number of patients inour trials who actually crossed over to treatment with Orathecin significantlyexceeded the number anticipated and was nearly 50% in two of our Phase IIIstudies. The extent of this cross over has negatively affected the statisticalanalysis of the study with respect to the overall survival analysis, making itdifficult to determine if the product is efficacious with respect to survival.

In May 2003, weannounced data from one of our Phase III studies of Orathecin in patients withadvanced pancreatic cancer, most of whom had previously failed two or morechemotherapy treatments. The study randomized 409 patients to either Orathecinor “best medical therapy.” The primary study end-point was overall survivalwith secondary endpoints, including tumor response and time to diseaseprogression. We did not meet the primary endpoint, although we did meet two ofthe secondary end-points. The two secondary end-points were independent of across-over effect whereas the primary end-point was not. It remains uncertainwhether the released data, and the data from our other clinical trials, will besufficient to support regulatory approval for Orathecin, and additional trialsmay be required before we can obtain regulatory approval.

*Other PotentialIndications*

In addition to studies relating to pancreatic cancer,pre-clinical studies have shown Orathecin to be active in more than 30 humanand animal tumor models in indications such as breast, lung, colorectal,ovarian, gastric and prostate cancers, as well as sarcomas. We have pursuednumerous Phase I/II trials using Orathecin both as a single therapeutic agentand in combination with other anti-cancer agents in solid tumors andhematological malignancies.

In addition, we arecurrently conducting the 30 patient, non-randomized portion, of a phase IIIstudy using Orathecin in combination with gemcitabine. In other combinationstudies to date, Orathecin has not exhibited significant cardiac, pulmonary,hepatic or renal toxicities that often limit the acute and/or chronic dosagesof several chemotherapeutics. The primary dose-limiting toxicities associatedwith Orathecin are hematologic and gastrointestinal disorders.

***Nipent***

Nipent inhibits a key enzyme in the DNA synthesisprocess and results in cytotoxicity, primarily in lymphocytes, with littleother known effect on normal tissue. We acquired Nipent from the Parke-Davisdivision of the Warner-Lambert Company (Pfizer) in 1996 and the remainingEuropean rights in February 2004. Wyeth is the current distributor outsideof the United States. We believe that Nipent’s most unique feature is itsselectivity for lymphocytes, which has created an interest in this product forthe treatment of cancers of the lymphoid system and other hematologicmalignancies. Nipent has been our principal source of revenue since 2000.

7

----

*Hairy Cell Leukemia*

We are selling Nipentdirectly in the United States for the treatment of hairy cell leukemia, a typeof B-lymphocytic leukemia. Wyeth sells Nipent outside the United States under adistribution agreement we acquired in February 2004. Warner-Lamberthad initially retained a worldwide, royalty-free license to sell Nipent, butsold these rights to us in February 2004.

*Other Indications*

Phase IV trials suggest that Nipent may have activityin a variety of other hematologic cancers. We are conducting Phase IV studiesfor treatment of hematological malignancies and disorders, such as CLL, NHL,and cutaneous and peripheral T-cell lymphomas.

In addition, Nipent hasshown activity in various autoimmune diseases, including GvHD, bone marrowtransplantation and multiple sclerosis. We believe that the United Statesmarkets for GvHD and various autoimmune diseases are larger than the market forhairy cell leukemia. We are conducting Phase I clinical trials inautoimmune conditions and Phase II trials in GvHD, and developing an oralformulation of Nipent, which may be suitable for more chronic administration.

***Other Products and Product Candidates***

Inaddition to our three key compounds, Dacogen, Orathecin, and Nipent, we havethe following products and product candidates:
| Product Category     | ** ** | ** **                | ** ** | **Compound**                                  | ** ** | ** ** | ** ** | **Indication or  Intended Use** | ** ** | **Therapeutic  Category** | ** ** | **Regulatory  Status** |
|----------------------|------------|---------------------------|------------|-----------------------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------|------------|------------------------|
| Generic Anti-Cancer  |       | Mitomycin                 |       | Solid tumors                                  |       | Cancer     |       | Marketed                        |
| Products             |       | Daunorubicin              |       | Acute leukemias                               |       | Cancer     |       | Marketed                        |
|                      |       | Paclitaxel                |       | Solid tumors                                  |       | Cancer     |       | Approved                        |
| Non-Pharmaceutical   |       | Surface Safe®        |       | Surface Decontaminate                         |       |       |       | Marketed                        |
| Product              |       |                      |       |                                          |       |       |       |                            |
| Formulation Products |       | Mitozytrex                |       | Solid tumors                                  |       | Cancer     |       | Approved                        |
|                      |       | Inhaled Orathecin         |       | Solid tumors                                  |       | Cancer     |       | Phase II                        |
|                      |       | 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 

8

----

an abbreviated new drugapplication (“ANDA”) and obtain marketing clearance, or that offer significantmarket opportunities.

*Mitomycin.  *We receivedapproval of an ANDA for our generic mitomycin in 1998 for the treatment ofdisseminated adenocarcinoma of the stomach or pancreas in proven combinationswith other approved chemotherapeutic agents and as palliative treatment whenother modalities have failed. We are currently selling mitomycin in the UnitedStates and we are also a contract supplier for another distributor in theUnited States.

*Daunorubicin.  *We receivedapproval of an ANDA for generic daunorubicin for a variety of acute leukemiasin 2001. We have entered into a letter of intent to provide this product to aUnited States distributor on a contract manufacturing basis.

*Paclitaxel.  *Wefiled an ANDA for generic paclitaxel with the FDA in August 1998. During November 2004,we received approval from the FDA of our ANDA Paclitaxel Injection, 6 mg/mL,packaged in 30 mg/5 mL and 100 mg/16.7 mL multiple-dose vials. Paclitaxelbelongs to the group of medicines called antineoplastics. The drug isequivalent to Bristol-Myers Squibb’s Taxol® Injection; an anti-tumor agent thathas become one of the most widely used anti-cancer products. PaclitaxelInjection’s approved indication is identical to Taxol and is indicated astreatment for a variety of cancers. At this time we will not directly marketthis product, but are in discussions with United States distributors to licenseout the ANDA.

*Non-PharmaceuticalProduct*

*SurfaceSafe.  *Surface Safe is a two-step disposable towelettecleaning system used to decontaminate work surfaces where chemotherapeuticpreparation is conducted, which we acquired in July 1999 from Aldorr, Inc.,a medical technology development company. The first towelette containschemicals recommended by the Centers for Disease Control and the OccupationalSafety Health Administration to clean work surfaces. The second towelette isused to deactivate the chemicals used in the first towelette, in order toprevent damage to work surfaces through its potent oxidizing process.

*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 firstproduct utilizing our formulation technology, Mitozytrex, which is aformulation of generic mitomycin, was approved by the FDA in November 2002for use in the therapy of disseminated adenocarcinoma of the stomach orpancreas in proven combinations with other approved chemotherapeutic agents andas palliative treatment when other modalities have failed. We cannot promoteMitozytrex as providing any injection site ulceration protection, nor can wepromote any commercially viable increased stability, solubility or shelf lifeextension, as compared to generic mitomycin. We must develop and submitadditional data to the FDA in NDA supplements and receive FDA approval foradditional claims. We are currently exploring marketing opportunities and/ormarketing partners for Mitozytrex.

*Inhaled Cancer Drugs.  *In December 1999,we acquired worldwide licenses from Clayton Foundation for Research and itstechnology transfer organization, Research Development Foundation, to make andsell inhaled versions of formulations of camptothecins, including Orathecin. PhaseI clinical studies with inhaled Orathecin for the treatment of lung cancer andpulmonary metastatic disease have been completed 

9

----

at the M.D. AndersonCancer Center and the Baylor College of Medicine and a Phase II study isunderway.

*Partaject Drug 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.

*Partaject products under development.  *Busulfanis currently marketed in an oral dosage form by GlaxoSmithKline for thepalliative treatment of CML. It is used “off-label” as a bone marrow ablatingagent prior to bone marrow transplants. In 1998, we completed a Phase Iclinical trial of Partaject busulfan at both Johns Hopkins Oncology Center andDuke University Medical Center. A Phase I clinical trial in pediatric bonemarrow ablation has been completed in 35 patients at St. Jude’s Children’sHospital in Memphis.

*Oral Prodrug Delivery Technology—CZ 112.  *Oralprodrug delivery technology involves administering an inactive compound, knownas a prodrug, which is absorbed in the digestive tract and is convertedenzymatically to an active agent in the liver. Oral prodrug delivery technologycould potentially enable the oral delivery of drugs that are otherwise onlyused in an intravenous formulation. The resulting active compounds may passthrough the systemic circulation and act at peripheral sites. We are applyingthe oral prodrug delivery technology to compounds selected for their potentialeither to serve as oral delivery agents for systemically activechemotherapeutic or radio sensitizing drugs previously available only inintravenous form. CZ 112 is an oral prodrug for Orathecin we licensed fromStehlin in November 1999 after initial Phase I testing. We are currentlycompleting additional pre-clinical tumor model studies prior to deciding toundertake further clinical development.

*Cremophor-FreePaclitaxel.  *In January and October 2000, wewere issued two United States patents for a cremophor-free formulation ofpaclitaxel. We were issued a third patent for an oral formulation in November 2001.We believe that these patents have important clinical and strategicimplications as such a formulation obviates the need for pre-medication, whichis currently required with the use of paclitaxel. We believe that the lack ofpre-medication and an oral formulation will prove to be major competitiveadvantages in the paclitaxel market.

*Product Candidates*

*Avicine.  *In July 2000,we acquired the sales and marketing rights in the United States to Avicine fromAVI BioPharma, Inc. (“AVI”). Avicine is a therapeutic cancer vaccine andhas completed Phase II clinical trials for colorectal and pancreaticcancer.

*VEGF(Anti-Angiogenesis).  *In February 2001, we licensedfrom Peregrine Pharmaceuticals (formerly known as Techniclone Corp.) a platformdrug-targeting technology known as Vascular Targeting Agent (“VTA”). Thelicensed technology is related to Vascular Endothelial Growth Factor (“VEGF”). TheVTA technology is a proprietary platform designed to specifically target atumor’s blood supply and subsequently destroy the tumor with various attachedtherapeutic agents. We are currently in the process of exploring marketing opportunitiesand/or marketing partners for this product.

10

----

**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 formulation productshaving a significant competitive advantage over their counterparts currently onthe market. In March 1994, we acquired exclusive worldwide rights to thepatented cyclodextrin technology used in our formulation technology fromJanssen Biotech, N.V. (“Janssen”) 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 DHEA phosphocholinederivative which may have utility in obesity and diabetes.

**Research andDevelopment**

Because of the stage ofour development and the nature of our business, we expend significant resourceson research and development activities. We expended $24.0 million in 2004,$26.3 million in 2003, and $29.9 million in 2002 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 includeDacogen, Orathecin, and studies on additional uses for Nipent.

*Dacogen*

From 1999 through 2004, we have spent approximately$11.3 million on the pre-clinical and clinical development of Dacogen. Dacogenis our investigational anti-cancer therapeutic for the treatment of patientswith MDS. We submitted an NDA for Dacogen to the FDA on November 1, 2004and it was accepted for filing on December 31, 2004. A response isexpected from the FDA by September 1, 2005. On October 1, 2004, EuroGensubmitted a MAA for Dacogen to the EMEA. Thesubmission was accepted for review on October 25, 2004. EMEA proceduresprovide that a decision on the Dacogen MAA will usually occur within 12 monthsof acceptance of the submission.

In September 2004, welicensed to MGI the exclusive worldwide rights to the development,commercialization and distribution of Dacogen for all indications. We will continueto pursue regulatory approvals of Dacogen for the treatment of MDS in theUnited States and Europe, with assistance from MGI, provided that alldevelopment of Dacogen will be transitioned to MGI no later than the end of2005. MGI will assume full development responsibilities following thetransition to them. MGI is required to 

11

----

fundfurther development costs associated with Dacogen at a minimum of $15 millionover a three year period.

*Orathecin*

From 1998 through 2004 we have spent approximately$69.9 million on the Orathecin program. On January 26, 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. The filing was accepted by the FDA and indicated a target PDUFA dateof November 26, 2004. At the request of the FDA, during November 2004we submitted additional clinical data from a trial of Orathecin as a first-linetreatment for pancreatic cancer as well as new analyses of data from thepivotal study in 2nd and 3rd line patients. The FDA classified these data as aMajor Amendment, which triggered an extension of the review period by 90 days,resulting in a revised target PDUFA date of February 26, 2005. Based onfurther discussions and feedback with both the FDA and consultants helping usdialog with the FDA, it was determined the current package for Orathecin wasnot sufficient to gain approval at this time in the United States and weannounced the withdrawal of the NDA in January 2005. During the 2005 firstquarter we received the findings from the FDA and will review these findingsand determine the most appropriate course of action in the future for Orathecinin the United States.

During July 2004, wesubmitted a MAA to the EMEA seeking approval of Orathecin. The MAA forOrathecin was submitted by our European subsidiary, EuroGen, and will bereviewed under the EMEA Centralized Procedure, where marketing authorization isapplied for in all 25 EU Member States simultaneously. EMEA proceduresgenerally provide that a decision on the Orathecin MAA will usually occurwithin 12 months of acceptance of the submission. Our European filing forOrathecin remains on track and is not affected by the withdrawal of the NDA forOrathecin in the United States.

*Nipent*

Through December 31,2004, we have spent approximately $14.5 million on Phase I, II, and PhaseIV programs related to different potential indications for Nipent. We believethat Nipent has a unique mechanism of action and Phase IV trials indicate thatit may have activity in a variety of other hematologic cancers. We areconducting Phase IV studies for treatment of hematological malignancies anddisorders, such as CLL, NHL, cutaneous and peripheral T-cell lymphomas andacute and chronic GvHD. Nipent has received orphan drug designation by the FDAfor treatment of CLL and cutaneous T-cell lymphoma.

**Sales and Marketing**

We currently have 37 employees focused on sales,marketing, and sales support of our products to cancer hospitals and clinics inthe United States. The large majority of these hospitals are members ofhospital buying groups. We have focused our efforts on selling to these groupssince because they control a significant majority of the business in theoncology and blood disorder pharmaceutical market. We also market our products,including Nipent, to private practice oncology clinics, oncology distributorsand drug wholesalers. Oncologists/hematologists, oncology nurses and oncologypharmacists are included in each of these classes of customers.

Since acceptance of our products from each buyinggroup can be time consuming, there may be significant delays before we can winbids and generate sales revenue. To date, a large number of these buyinggroups, including Premier Purchasing Partners, Novation, Kaiser Permanente, andthe Department of Veteran Affairs, have given us approved vendor status for ourproducts. In addition, we have gained recognition as an approved vendor in eachstate that requires registration or licensing before bidding for thosecustomers.

12

----

There are approximately 5,000 private practiceoncologists/hematologists in the United States. These physicians usuallypurchase oncology products through distributors with whom we have developedrelationships. The four major oncology distributors in the United States areOncology Therapeutic Network Joint Venture, L.P., Oncology Supply, CardinalHealthcare, and Priority Healthcare Corporation. These distributors controlapproximately 60% of the private practice oncology clinics, which in turnrepresent approximately 30% of the oncology-related pharmaceuticalmarket. We have taken significant steps in building relationships with thesedistributors, all of which distribute Nipent. Our sales force will alsocontinue to target the important private practice oncology clinics within theirassigned territories. We also sell to large drug wholesalers that supplyhospitals and hospital buying groups. In addition, we have partnershiparrangements with Group Physician Organizations including Pharmatech, U.S.Oncology, and National Oncology Alliance.

Our sales group is dividedinto three regions. Each region is headed by a manager with extensive industryexperience who supervises specialty oncology sales representatives. We plan toexpand our sales force to improve market penetration of Nipent. Our sales andmarketing group conducts direct sales, sponsors speakers’ programs, works withdistributors, performs market research analysis, develops marketing strategies,creates and implements educational and promotional programs, establishespricing and product advertising and maintains compliance with hospital andother buying groups.

**Manufacturing**

We currently outsource manufacturing for all of ourproducts to United States and foreign suppliers. We expect to continue tooutsource manufacturing in the near term. We believe our current suppliers willbe able to efficiently manufacture our proprietary and generic compounds insufficient quantities and on a timely basis, while maintaining product qualityand compliance with FDA and foreign regulations. We maintain oversight of thequality control function of our third-party manufacturers through ongoinginspections, rigorous review, control over documented operating procedures, andthorough analytical testing by outside laboratories. We believe that ourcurrent strategy of outsourcing manufacturing is cost-effective because weavoid the high fixed costs of plant, equipment, and large manufacturing staffs.

The FDA must issue marketing clearance and deem amanufacturer acceptable under current good manufacturing practices (“GMPs”)before production of active pharmaceutical ingredients, finishedpharmaceuticals, or proprietary and generic drugs for commercial sale may begin.Once a proprietary or generic compound is manufactured on our behalf, it issent to one or more domestic manufacturers that process it into the finisheddosage forms. We currently follow these procedures for our marketed products,Nipent and mitomycin. We then ship our finished proprietary and genericproducts to outside vendors for distribution to our customers.

In December 1997, we received approval from theFDA to commercially manufacture Nipent at one of our designated vendor’smanufacturing sites using our proprietary manufacturing process. This vendordeclared bankruptcy in July 2001 and closed its manufacturing facility. Wetransferred the manufacturing of Nipent to a new vendor in mid-2001, andthe manufacturer was qualified by the FDA in May 2002. This company wentout of business in late 2004. However, we have contracted with anothermanufacturer to purify Nipent, and we do not anticipate any interruptions toour supply of drug available for sale. In April 1998, the FDA approved ourapplication for the production and commercial distribution of mitomycin forinjection. In November 2001, the FDA approved our application for theproduction and commercial distribution of daunorubicin hydrochloride injection.See “*Risk Factors—Our business may be harmed if themanufacture of our products is interrupted or discontinued.*”

We intend to continue evaluating our manufacturingrequirements and may establish or acquire our own facilities to manufacture ourproducts for commercial distribution if doing so would reduce costs or improvecontrol and flexibility of product supply.

13

----

**BusinessRelationships and Material Contracts**

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

We identify and license orbuy rights to products or compounds that are typically in human clinicaldevelopment. We then seek to enhance and complete the product development andbring the product to market internally or through collaborations. We haveentered into a variety of strategic and collaborative relationships andlicensing agreements in pursuing our business. Some of our more significantrelationships are as follows:

*1.*   The Stehlin Foundationfor Cancer Research—Orathecin

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 the agreement. Title to all inventions andother intellectual property made jointly by employees or consultants of theparties in connection with the agreement are jointly owned by the parties. Inthe event Stehlin elects to license any product (other than the Orathecinproducts) for human medicinal purposes for any uses that include pancreaticcancer or antineoplastic use, we have the right of first refusal to obtainfrom  Stehlin a license under patentsowned or controlled by Stehlin to market such products.

We were required to pay Stehlin approximately$9.6 million for research. Our agreement with Stehlin also calls foradditional payments in our common stock upon the achievement of specifiedmilestones and royalties on any product sales. We must make milestone paymentsunder the agreement upon (a) notification by the FDA of the acceptance forfiling of the first NDA submitted for Orathecin and (b) our receipt of theFDA notice that it has approved Orathecin for marketing. Each of such paymentswill be made in restricted shares of our common stock at a per share purchaseprice equal to the average trading price of the shares over a 30-daytrading period. Through December 31, 2004, we have paid Stehlin all of the$9.6 million required for research. During the year ended December 31,2004, the FDA accepted for filing our NDA submission for Orathecin. Thistriggered a required milestone payment to Stehlin of $500,000. We made themilestone payment through the issuance of 63,969 shares of unregistered commonstock, which was calculated based on the average trading price of our stockduring the 30-day period preceding the payment date.

Unless terminated sooneras provided in the agreement, the agreement will continue in full force andeffect on a country-by-country and licensed product-by-licensed product basisuntil there are no remaining royalty payment obligations in a country, at whichtime the agreement will terminate in its entirety in such 

14

----

country.We will 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 certain terminationrights. Further, either party may terminate the agreement if the other becomesthe subject of a voluntary or involuntary petition in bankruptcy or anyproceeding relating to insolvency, receivership or liquidation for the benefitof creditors, if that petition or proceeding is not dismissed with prejudicewithin 60 days after filing.

2.   *Pharmachemie—Dacogen*

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 theagreement, we obtained all rights and title with respect to the know-howrelated to the Decitabine Project, including the related intellectual propertyrights, and the exclusive world-wide right to use the know-how for any purposewhatsoever, including the filing of applications for marketing approval of theproducts. Upon execution of the agreement, we delivered to Pharmachemie sharesof our common stock equal to $3.4 million aggregate amount.

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

In September 1996, we entered into a Purchase andSale Agreement with the Warner-Lambert Company (now Pfizer), pursuant towhich we agreed to purchase the exclusive rights to the anti-cancer drugNipent from Warner-Lambert for the United States, Canada and Mexico. Theassets we acquired included all of Warner-Lambert’s unpurified crudeconcentrate form of pentostatin, from which Nipent is made, and relatedinventory, new drug application, Canadian new drug submission and certainintellectual property.

Under the agreement, we granted Warner-Lambertan irrevocable, non-exclusive, worldwide, perpetual and royalty-free license touse the know-how acquired by us under the agreement (in or outside theterritories of the United States, Canada and Mexico) to the extent necessary tomanufacture the pentostatin product for sale exclusively outside the UnitedStates, Canada and Mexico. Warner-Lambert may sublicense or assign suchrights to any third party, subject to the terms of the agreement.

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, weentered into a Purchase and Sale Agreement with Pfizer Inc. to acquire Europeanmarketing rights for Nipent.We paid Pfizer $1,000,000 under this agreement.

4.   *Peregrine Pharmaceuticals—VEGF*

In February 2001, we entered into a LicenseAgreement to license a platform drug-targeting technology known as VascularTargeting Agent from Peregrine Pharmaceuticals. The licensed technology 

15

----

is related to VEGF. TheVTA technology is a proprietary platform designed to specifically target atumor’s blood supply and subsequently destroy the tumor with various attachedtherapeutic agents.

Under the agreement, we obtained an exclusive,worldwide, royalty-bearing license to Peregrine’s patents related to theVEGF technology, which permits us to make, use, import, sell and otherwiseexploit and distribute licensed products using the VEGF technology. We may alsogrant sublicenses under 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 toresearch 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 investigational new drug application (“IND”) in the UnitedStates utilizing the licensed patents. In addition, the terms of the agreementrequire that we pay milestone payments and royalties to Peregrine based on thenet revenues of any drugs commercialized using the VEGF technology. Themilestone payments could ultimately total approximately $8.25 million,plus additional royalty payments as required under the agreement. We arerequired to make milestone payments to Peregrine upon (a) commencement byus of the first Phase III trial in the United States, Europe or Japan for thefirst 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 willcontinue in full force and effect on a country-by-country and licensedproduct-by-licensed product basis until there are no remaining royalty paymentobligations in a country, at which time the agreement will terminate in itsentirety in such country, unless terminated sooner as provided in theagreement. Upon termination of the agreement in any country, we will have anon-exclusive, irrevocable, fully paid-up right and license to use and exploitthe licensed patents in that country. We may terminate the agreement withrespect to any country with 30 days written notice to Peregrine. Inaddition, if either party materially breaches the agreement, the other partywill have termination rights.

5.   *AMUR Pharmaceuticals, Inc.*

In September 2000, weacquired the intellectual property of AMUR Pharmaceuticals, Inc. (“AMUR”)a company with the proprietary rights to AM 454, which can potentially preventthe onset of Type II diabetes according to pre-clinical animal studies, andrights to a 20K growth hormone, with potential for treatment of Type IIdiabetes. AMUR’s technology is based on a water-soluble class ofhormones. We acquired these rights in exchange for 37,795 shares of our commonstock and two-year warrants to purchase 200,000 shares of our common stock at$40.00 per share. In 2002, these warrants were extended for two additionalyears but expired unexercised in 2004.

6.   *Clayton Foundation for Research—Camptothecin and Paclitaxel*

*License Agreements*

In November 1999, we entered into two licenseagreements with the Clayton Foundation for Research (“Clayton”), a Texasnonprofit corporation, and the Research Development Foundation (“RDF”), aNevada nonprofit corporation, to obtain exclusive, worldwide licenses from RDFto produce, make, manufacture, use, sell, rent and lease methods, processes orproducts involving RDF’s camptothecin product and RDF’s paclitaxel product, andrelated proprietary property under the agreements. We agreed 

16

----

to use commerciallyreasonable efforts with regard to commercialization of the products under theagreements.  The paclitaxel licenseagreement was subsequently terminated in 2003.

Under the terms of the camptothecin agreement, RDF maynot license any other party rights to deliver camptothecin, or analoguesthereof, alone or in combination with another drug, in liposomes, lipidcomplexes or other liposome particles to the respiratory tract via aerosoldroplets. We also have the right to grant sublicenses to others within thescope of and under the terms and conditions of the agreement. We must providewritten notice of any such sublicenses to RDF. We also have the right to reviewand reference the know-how in any application or filing relating to theproprietary property with any governmental or regulatory authority.

RDF will, at its own expense, file patent applicationsrelating to the proprietary property in the United States and any othercountries agreed upon by the parties under the agreement. RDF agrees to use itsbest efforts to prosecute such patent applications and to maintain any patentsissued thereon. We, in our sole discretion, may elect to assume responsibility(and to pay any associated fees and expenses) with respect to any patentapplications or patents that RDF intends to abandon. We may abandon any patentapplications or patents for which we have assumed responsibility and will notbe liable to RDF in any way for such abandonment.

Any improvements on the proprietary property under theagreement, whether patentable, copyrightable or not, now or hereafter made andfound by our agents or employees, shall be owned by RDF and will be consideredpart of the licensed proprietary property under the agreement. The worldwiderights in the corresponding patents, patent applications, copyrights and/orknow-how will be the property of RDF subject to all the terms and conditions ofthe agreements, and will be licensed to us under the applicable agreement.

Upon execution of each of the agreements, we paid RDFan up-front non-refundable license fee consisting of $410,000 in shares of ourcommon stock under each original agreement. In addition, we must pay RDFroyalties based on gross revenues under the camptothecin agreement. Only oneroyalty will be payable on a product, regardless of the number of licensedapplications and licensed patents of the proprietary property under which suchproduct has been manufactured, used or sold. We will also pay RDF fees receivedfrom sublicensees of the licensed proprietary property under the agreement. However,the parties agree that RDF is not entitled to any share of amounts received byus for pilot studies, research and development, the license or sublicense ofany intellectual property other than the licensed proprietary property,reimbursement for patent or other expenses, or as consideration for equity ordebt in connection with activities under the agreement.

In addition to the up-front license fee and royalties,we must also make milestone payments to RDF in the form of our common stockwith respect to each product under the camptothecin agreement upon (a) theearlier of (1) approval or (2) the date of effectiveness of an INDfiled with the FDA for such product; (b) completion of a Phase I humanclinical trial for such product and the final report thereon; (c) completionof a Phase II human clinical trial for such product and the final reportthereon; (d) completion of any other phase of human clinical trials forsuch product required by the FDA and the final report thereon; and (e) uponapproval by the FDA of an NDA for such product.

The term of thecamptothecin agreement is for a period of ten years extending from the firstcommercial revenue actually collected under the applicable agreement or for thelife of the last to expire of the patents or patent applications of thelicensed proprietary property thereunder, whichever is earlier, unless soonerterminated by the parties pursuant to the agreement.

17

----

7.   *Cyclex, Inc.*

In March 1994, we entered into a Patent LicenseAgreement with Cyclex, Inc. pursuant to which we obtained a license undera patent identified in the agreement to make, use and sell pharmaceuticalproducts for cytotoxic anti-cancer formulations containing HPBCD andcertain other ingredients, for use in the United States. Cyclex agrees that itwill not enter into a license agreement with any other parties granting therights to make, use and sell the licensed products in the United States. The rightsgranted to us under the agreement are non-transferable, and we may not grantsublicenses thereof.

In consideration of therights granted under the agreement, we must pay a 3% royalty to Cyclex on ournet sales under the agreement. Only one royalty payment is due to Cyclex forthe initial sale made by us or for the internal transfer price of each licensedproduct. The agreement will remain in effect until the expiration of thelicensed patent under the agreement, or a final finding of invalidity or withdrawalof the licensed patent, subject to earlier termination for breach.

8.   *Janssen Biotech, N.V.*

In March 1994, we entered into a WorldwideLicense Agreement with Janssen, pursuant to which we obtained from Janssen anexclusive license to make, use and sell the pharmaceutical cytotoxic anti-cancerformulations containing HPBCD and certain other ingredients as developed byJanssen, for use worldwide except in the United States. We also have the rightto grant sublicenses of the product. The rights granted under the agreement areotherwise non-transferable, except to affiliates.

In consideration of the rights granted under theagreement, we must pay a royalty of 4% for the license of the know-how in allcountries and a royalty under the patent rights of 3% in those countries wherepatent rights have been granted. In addition, we paid Janssen a down payment of$60,000 in connection with the execution of the agreement, and must makeadditional milestone payments to Janssen during the term of the agreement. We paid$350,000 in 2003 following the approval of Mitozytrex.

The agreement will remainin effect until the expiration of the last to expire patent rights under theagreement, subject to earlier termination for breach. In the event, however,that after the expiration of the patent rights, the know-how under theagreement is still confidential and substantial, then the term of the agreementwill be renewed for successive periods of one year each during which ourobligations to pay royalties under the agreement will be limited to know-howrelated royalties.

9.   *The Jackson Laboratory*

In September 1993, we entered into a PatentLicense and Royalty Agreement with The Jackson Laboratory (“Jackson”) pursuantto which we obtained an exclusive right and license in and to the patents andpatent rights related to three patents identified in the agreement, whichrelate to our proprietary formulation technology, together with the right togrant sublicenses thereof. Jackson retained a royalty-free, non-exclusive,non-transferable license and right to the patent rights under the agreement forits own research and institutional purposes. We have the right to state in anyadvertising, promotions or sales materials that we are the exclusive licenseeof Jackson under the patents covered by the agreement.

Upon execution of the agreement, we paid Jackson aone-time reimbursement fee of $25,000. In addition, we must pay Jacksonroyalties equal to 2% of the net sales price of any patent products leased orsold by us, and a royalty equal to 10% of the net royalty paid to us on accountof any lease or sale of such patent rights and related products. We must alsopay Jackson an annual payment of $2,500 per year, payable each year until theyear of the last-to-expire patent rights. We must also pay any expenses for thepreparation and filing of new patent applications and patent maintenance feesfor all issued patents covered by the agreement.

18

----

The agreement may beterminated by Jackson if we cease to carry on our business, fail to payroyalties owed under the agreement or otherwise materially breach theagreement. We may terminate the agreement upon six month’s notice to Jackson.

10.   *AVI BioPharma, Inc.—Avicine*

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 Avicine, AVI’s proprietary cancer vaccine currently inlate-stage clinical testing against a variety of solid tumors. Avicine is animmunotherapy that neutralizes the effect of a tumor-associated antigenon cancer cells, while stimulating the body’s immune system to react againstthe 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, paidin a combination of $5.0 million cash and the issuance of 347,826 sharesof our common stock. As part of the agreement, we have a warrant to acquire upto an additional 10% of AVI’s common stock at an aggregate exercise price equalto $60.0 million, or $35.625 per share. This warrant is exercisable for athree-year period commencing on the earlier of the date the FDA accepts the NDAsubmitted for Avicine, or the 

19

----

date on which the closingprice of AVI’s common stock exceeds the warrant exercise price. Neither eventhad occurred as of December 31, 2004.

We will be required to make additional milestonepayments to AVI for an aggregate of up to $80.0 million, including (a) $2.5 millionin our stock or cash, upon completion of accrual into the Phase III trial forAvicine; (b) $2.5 million in our stock or cash, upon acceptance bythe FDA of the NDA submitted for Avicine; (c) $5.0 million in ourstock or cash, upon launch of Avicine in the United States, (d) $10.0 millionin cash, when our annual Avicine product sales reach $100.0 million; (e) $15.0 millionin cash, when our annual Avicine product sales reach $250.0 million; (f) $20.0 millionin cash, when our annual Avicine product sales reach $500.0 million; and (g) $25.0 millionin cash, when our annual Avicine product sales reach $1.0 billion. Theability to make milestone payments in our stock shall be at our option, subjectto ownership limitations.

Unless terminated sooneras provided in the agreement, the agreement will expire upon the earlier of (a) thedate upon which a generic version of Avicine is first sold in the United Statesby someone other than us or (b) the date which is 15 years after thedate of regulatory approval of Avicine in the United States, provided that thewe and AVI may renew the agreement for the United States for (1) furthersuccessive one year periods, or (2) further successive periods of timeduring which any applicable marketing exclusivity precludes the effectiveapproval by the FDA of any product containing Avicine. In addition, eitherparty may terminate the agreement if the ownership or control of at least 50%of the assets or voting securities of the other party are transferred and, inthe non-changing party’s reasonable judgment, the other party’s new owner orcontrolling entity is a competitor of the non-changing party in the field ofoncology.

***Supply and Distribution Agreements***

Wehave entered into a variety of supply and distribution agreements in pursuingour business. Some of our more significant relationships are as follows:

1.   *Abbott Laboratories—Nipent*

In December 1999, we entered into a Nipent U.S.Distribution Agreement with Abbott Laboratories. Under the agreement, we mustsupply Nipent inventory exclusively to Abbott on a consignment basis, fordistribution by Abbott within the United States. At no time during theperformance of the agreement will title to the products pass from us to Abbott.

As of March 1, 2000, Abbott became the exclusiveUnited States distributor of Nipent for a period of five years under theagreement, with the sole and exclusive right to commercially distribute theproduct to third parties within the United States. Abbott may sell anddistribute Nipent in the United States, collect monies due for those sales,convey a portion of such monies to us four times per year, and retain a portionof the monies collected as the fee for the distribution work. We retain allUnited States promotional, advertising and marketing rights for Nipent. Uponreceipt by Abbott of orders for products under the agreement, Abbott must shipand invoice the products at the wholesale acquisition cost for the productestablished by us and reported to Abbott.

In January 2000,Abbott made a $5.0 million cash payment to us in connection with thegranting of the exclusive distribution rights by us to Abbott. In March 2003,we paid Abbott $500,000 for the right to terminate the agreement at our option,for a stated fee that decreases over time to $1.5 million at March 2005.  In February 2005, we paid $1.5 million toAbbott to terminate this agreement effective March 1, 2005.

20

----

2.   *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, weentered into a Purchase and Sale Agreement with Pfizer Inc. to terminate thisSupply Agreement and to acquire European marketing rights for Nipent. We paid Pfizer $1.0 million under thisagreement.

3.   *Hauser Technical Services—Pentostatin (Nipent)*

In December 2002, we entered into a PentostatinSupply Agreement with Hauser Technical Services, Inc., (“Hauser”). Underthe agreement, Hauser batch processed pentostatin crude concentrate supplied toHauser by us or parties authorized by us, to yield pentostatin as an activepharmaceutical ingredient (“API”).

In April 2003, HauserInc., Hauser’s parent company, and its wholly-owned subsidiaries filed forreorganization under chapter 11 (“Hauser Companies”). The Hauser Companies havesold their operating businesses and have proposed a liquidating plan ofreorganization. The Pentostatin Supply Agreement was not included in the sale. Wehave recovered, with Hauser’s consent and cooperation, our pentostatin crude concentrate,all work-in-process, all API and deliverables processed for us, includingstability samples, standards for pentostatin, and the s-isomer standards andcertain related equipment previously held by Hauser. We do not believe that wehave any remaining obligations to Hauser.

4.   *EuroGen Pharmaceuticals Ltd.*

In September 2001, we entered into a Supply andDistribution Agreement with EuroGen, our majority owned subsidiary. Under theagreement, we granted EuroGen the exclusive European and South African rightsto promote, market, distribute and sell certain of our existing generic andother products or compounds. The agreement also establishes a process forgranting EuroGen rights to sell additional products in Europe and South Africa,subject to our compliance with our other existing licensing and distributionarrangements. After complying with these existing obligations, which includegiving certain third parties a right of first discussion, we will be requiredto offer EuroGen the option to obtain European and South African rights tocertain of our other products. The agreement grants EuroGen a non-exclusivelimited license to use our name and logo in connection with activities underthe agreement. EuroGen is required to seek and pay for all regulatory approvalsand authorizations necessary for the commercial sale of the products in theterritories where they market and sell the products.

The term of the agreement will expire 15 yearsafter the date of regulatory approval of the product under the agreement in thefirst country within the designated territory, unless terminated sooner forbreach, bankruptcy or insolvency of one of the parties. In addition, we mayterminate the agreement if EuroGen directly or indirectly develops, markets,sells or otherwise distributes any products within the designated territory,which could compete with the products under the agreement, or EuroGen appointsany third party to develop, market, sell or otherwise distribute any suchproducts which could compete with the products under the agreement.

During 2001, we loanedEuroGen $260,000 under a line of credit arrangement designed to cover start-upexpenses. During 2002, we advanced an additional $646,000 to EuroGen to fundits operations. In December 2002, all but one of the other investors inEuroGen withdrew their ownership interests in the entity, and we became 95%owners of EuroGen. The remaining 5% is owned by Larry Johnson, the 

21

----

Presidentand CEO of EuroGen. The amounts advanced to EuroGen, including the amountsadvanced in 2001, totaling $906,000 were charged to Selling, general, andadministrative expense in 2002. In 2003 and 2004, the results of EuroGen areincluded in our consolidated operations in Selling, general and administrativeexpenses. During the years ended December 31, 2004 and 2003, we haverecorded expenses of $2,269,000 and $325,000, respectively, related to theEuroGen.

5.   *Yunnan Hande Technological Development Co. Ltd.—Paclitaxel*

In May 1997, we entered into a Non-ExclusiveSupply Agreement, as subsequently amended in August 1997 and 2001, withYunnan Hande Technological Development Co. Ltd., (“Yunnan”). Yunnan hasdeveloped a process for the production of paclitaxel and has sought toimplement a process that meets current GMPs, and we have consulted with Yunnanregarding the development plans for the production of paclitaxel and otherproducts.

Under the agreement, we agreed to purchase a minimumquantity of paclitaxel before the end of one year from the date of approval ofour ANDA for the paclitaxel drug product, on a non-exclusive basis. Yunnan isfree to sell paclitaxel to any party in any place and we are free to purchasepaclitaxel from third parties. We paid Yunnan an aggregate of $1.0 millionduring the FDA inspection period for the products.

**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 impact upon themanufacturing, safety, labeling, storage, record-keeping and marketing ofsuch products. The lengthy process of seeking required approvals and thecontinuing need for compliance with applicable statutes and regulations,require 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 discovery ofpreviously unknown problems with such products, which may result inrestrictions on their manufacture, sale or use or in their withdrawal from themarket.

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

*Drug discovery.  *In theinitial stages of drug discovery before a compound reaches the laboratory, tensof thousands of potential compounds are randomly screened for activity againstan assay assumed to be predictive for particular disease targets. This drugdiscovery process can take several years. Once a company locates a “screeninglead,” or starting point for drug development, isolation and structuraldetermination may begin. The development process results in numerous chemicalmodifications to the screening lead in an attempt to improve the drugproperties of the lead. After a compound emerges from this process, the nextsteps are to conduct further preliminary studies on the mechanism of action,further in vitro, or test tube, screening against particular disease targetsand finally, some in vivo, or animal, screening. If the compound passes thesebarriers, the toxic effects of the compound are analyzed by performingpreliminary exploratory animal toxicology. If the results demonstrateacceptable levels of toxicity, the compound emerges from the basic researchmode and moves into the pre-clinical phase.

*Pre-clinical testing.  *Duringthe pre-clinical testing stage, laboratory and animal studies are conducted toshow biological activity of the compound against the targeted disease, and thecompound is evaluated for safety. These tests typically take approximatelythree and one-half years to complete, and must be conducted in compliance withGood Laboratory Practice (“GLP”) regulations.

22

----

*Investigational new drug application.  *Duringpre-clinical testing, an IND is submitted to the FDA to begin human testing ofthe drug. The IND becomes effective if not rejected by the FDA within30 days. The IND must include the chemical structure of the compound, howthe compound is manufactured, the results of animal studies and other previousexperiments, the method by which it is believed to work in the human body andhow, where and by whom the proposed new studies will be conducted. All clinicaltrials must be conducted in accordance with good clinical practices (“GCPs”).In addition, an Institutional Review Board (“IRB”) at the hospital or clinicwhere the proposed studies will be conducted, must review and approve theprotocol. The IRB has a responsibility to monitor the study for any safetyissues. Progress reports on the status of the clinical trials must be submittedat least annually to the FDA. The FDA may, at any time during a clinical trial,impose a ‘clinical hold’ if they have any safety concerns about a trial.If  such a case occurs, the clinicaltrial cannot continue until the FDA is satisfied that it is appropriate toproceed.

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

*Phase I clinical trials.  *Afteran IND becomes effective, Phase I human clinical trials can begin. These trialsgenerally involve 20 to 80 healthy volunteers 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 also evaluate how a drug is absorbed,distributed, metabolized and excreted by the body, and the duration of itsaction.

*Phase II clinical trials.  *InPhase II clinical trials, controlled studies are conducted on approximately 100to 300 patients with the targeted disease. The primary purpose of these trialsis to evaluate the safety of the drug in the target patient population butoften preliminary efficacy data is also obtained. These studies generally takeapproximately two years and may be conducted concurrently with Phase I clinicaltrials. For anti-cancer drugs, the first human studies are referred to as PhaseI/II studies because they evaluate safety and preliminary efficacy directly inthe target patient population. This is done because most anti-cancer drugs arevery toxic and cannot be administered to healthy volunteers, as is typical inPhase I studies.

*Phase III clinical trials.  *Thisphase typically lasts about three years and usually involves 1,000 to 3,000patients. Phase III trials typically compare an investigational agent against aproduct that is already approved for use in that indication. During thesetrials, physicians record observations as defined in the sponsor’s protocolonto “case report” forms. These data are monitored regularly by companyclinical monitors as well as the participating physician. There are specificrequirements for the physician to report any adverse reactions that may resultfrom the use of the drug. Company clinical monitors visit the sites regularlyand transmit the data back to the company for analysis and ultimately forpresentation to the FDA.

*Marketing application.  *Companies have the opportunity tointeract with health authorities, including both the FDA in the United Statesor the EMEA in the EU, during the course of a drug development program. Mostcompanies take advantage of this access to these agencies to gain furtherinsights about the kinds of data that will be expected in their marketingapplication. After the completion of the clinical trial phase, a company mustcompile all of the chemistry, manufacturing, preclinical and clinical data intoa marketing application. In the United States, this is called an NDA; in theEU, it is called a MAA. This is a significant amount of information, often inexcess of 100,000 pages, and it will be reviewed by these health authorities.

Both the FDA and the EMEA review these submissions foroverall content and completeness before accepting them for review and mayrequest additional information. Once an application is accepted for filing,each agency independently begins its in-depth review. In both the United Statesand Europe, there are specified timeframes for the health authorities tocomplete their review. The review process may be extended if an agency requestsadditional information or clarification regarding information already 

23

----

provided in thesubmission. In the United States, the FDA may refer the application to an appropriateadvisory committee, for a recommendation as to whether the application shouldbe approved but the FDA is not bound by this recommendation. If FDA evaluationsof the NDA and the manufacturing facilities are favorable, the FDA may issueeither an approval letter or an approvable letter. The latter typicallycontains a number of conditions that must be met in order to secure finalapproval. When and if those conditions have been met to the FDA’s satisfaction,the FDA will issue an approval letter, authorizing commercial marketing of thedrug for specific indications. If the FDA’s evaluation of the NDA submission ormanufacturing facilities is not favorable, the FDA may refuse to approve theNDA or issue a not approvable letter. The details of the review and approvalprocess in Europe have general similarities to that outlined for the UnitedStates.

*Marketing approval.  *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 whoare very diligent to monitor the use of new drugs introduced to the market. Regulatoryagencies around the world place great emphasis on pharmacovigilance, which is aterm used to describe the need for companies to monitor any adverse eventsoccurring in patients using the drug.

*Phase IV clinical trials and post marketing studies.  *Inaddition to studies requested by the FDA as a condition of approval, trials maybe conducted to generate more information about the drug. These studies maygenerate publications that broaden the use of the drug and its acceptance inthe medical community.

*“Fast Track.”*   A fast trackproduct is defined as a new drug or biologic intended for the treatment of aserious or life-threatening condition that demonstrates the potential toaddress unmet medical needs for such a condition. Under the fast track program,the sponsor of a new drug or biologic may request the FDA to designate the drugor biologic as a fast track product at any time during the development of theproduct. The FDA Modernization Act of 1997 specifies that the FDA mustdetermine if the product qualifies for fast track designation within60 days of receipt of the sponsor’s request. For a product designated asfast track, FDA may agree to accept the NDA in discreet sections to acceleratetheir review. This process is called a “rolling” review or a “rolling” NDA.

SuperGen obtained fast track designation for Orathecinfor the treatment of patients with locally advanced or metastatic pancreaticcancer, and Dacogen for the treatment of patients with MDS**,**and intend to seek such designation for other appropriate products. We cannotpredict the ultimate impact, if any, of the fast track process on the timing orlikelihood of FDA approval of any of our potential products.

*Approvals in 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 EMEA.This procedure is mandatory for the approval of biotechnology products and isavailable at the applicant’s option for other innovative products. Thecentralized procedure provides, for the first time in the EU, for the grantingof a single marketing authorization that is valid in all EU member states. Amutual recognition procedure is available at the request of the applicant forall medicinal products that are not subject to the mandatory centralizedprocedure, under a decentralized procedure. The decentralized procedureprovides a system for mutual recognition of national approvals and establishesprocedures for coordinated EU action on product suspensions and withdrawals.Under this procedure, the holder of a national marketing authorization forwhich mutual recognition is sought may submit an application to one or moremember states, certifying that identical dossiers are being submitted to allmember states for which recognition is sought. Within 90 days of receivingthe application and assessment report, each member state must decide whether ornot to recognize the approval. The procedure encourages member states to workwith applicants and other regulatory authorities to resolve disputes concerningmutual recognition. If such disputes cannot be 

24

----

resolved within the 90-dayperiod provided for review, the application will be subject to a bindingarbitration procedure at the request of the applicant. Alternatively, theapplication may be withdrawn.

We have applied, through EuroGen, for regulatoryapproval to market mitomycin and paclitaxel in the United Kingdom and incertain other countries within the EU. SuperGen had completed centralizedfilings for both Orathecin and Dacogen in the EU. Our product candidates willbe regulated in Europe as medicinal products.

*Approvals outside of the United States and EU.  *Stepssimilar to those in the United States must be undertaken in most othercountries comprising the market for our products before any such product can becommercialized in those countries. The approval procedure and the time requiredfor approval vary from country to country and may involve additional testing.There can be no assurance that approvals will be granted on a timely basis orat all. In addition, pricing approval is required in many countries; there canbe no assurance that the resulting prices would be sufficient to generate anacceptable return on investment.

*Off-LabelUse.  *Physicians may prescribe drugs for uses that arenot described in the product’s labeling. Such “off-label” uses are commonacross medical specialties and may constitute the best treatment for manypatients in varied circumstances. The FDA does not regulate the behavior ofphysicians in their choice of treatments but it does limit a manufacturer’scommunications on the subject of off-label use. Companies cannot activelypromote FDA-approved drugs for off-label uses, but they may disseminate tophysicians articles published in peer-reviewed journals, like *The New England Journal of Medicine*, that discuss off-labeluses of marketed products. To the extent allowed, we may disseminatepeer-reviewed articles on our products to our physician customers.

*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 published by the FDA (“listed drug”) 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 thesubmission of 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.

25

----

*Other GovernmentRegulations*

In addition to laws andregulations enforced by the FDA, we are also subject to regulation under theOccupational Safety and Health Act, the Environmental Protection Act, the ToxicSubstances Control Act, the Resource Conservation and Recovery Act and otherpresent and potential future federal, state or local laws and regulations, asour research and development may involve the controlled use of hazardousmaterials such as chemicals, viruses and various radioactive compounds.

**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 created and maintained by a number of methods, including,but not limited to:  patents, tradesecrets, know-how, trademarks, branding and a variety of market exclusivityprovisions. One such provision offers marketing exclusivity to drugs developedfor the treatment of rare diseases.

***Orphan Drug Designation***

The United States, EU, Japan and Australia all have anenacted an “orphan drug” or rare disease program for 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 generic identity of the therapeutic agent and its potentialorphan use are disclosed publicly. When a product with orphan drug statusreceives marketing approval for the indication for which it has suchdesignation, the product is entitled to marketing exclusivity, which means theregulatory authority may not approve any other applications to market the samedrug for the same indication, except in very limited circumstances, for sevenyears in the United States, ten years in Europe and Japan and four years inAustralia.

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 treatment of patients with MDS and sicklecell 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 “*Factors Affecting Future Operating Results—Our ability to protect ourintellectual property rights will be critically important to the success of ourbusiness, and we may not be able to protect these rights in the United Statesor 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 acquired licenses to or assignments of over 50 United States patentscovering various aspects of our proprietary drugs and technologies, including36 patents for various aspects of Orathecin and related products, six patentsunder our Nipent product portfolio, although none covers the use of Nipent inan intravenous injectable formulation for the treatment of hairy cell leukemia,six patents for our paclitaxel related products, one patent for Dacogen used incombination with an anti-neoplastic agent for the treatment of cancer,and two patents for our Surface Safe products. These issued United Statespatents will begin to expire in October 2012. We have been granted patentsand have received patent licenses relating to our proprietary formulationtechnology, non-oncology and Partaject 

26

----

technologies, among whichat least five patents are issued or licensed to us. In addition, we areprosecuting a number of patent applications for drug candidates that we are notactively 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 proprietaryproducts are dependent upon compliance with numerous licenses and agreements.These licenses and agreements may require us to make royalty and otherpayments, to reasonably exploit the underlying technology of applicablepatents, and to comply with regulatory filings. If we fail to comply with theseand other terms in these licenses and agreements, we could lose the underlyingrights to one or more of these potential products, which would adversely affectour product development and harm our business.

We also have patents orlicenses to patents issued outside of the United States, including Europe,Australia, Japan, Canada, Mexico and New Zealand. In addition, we have patentapplications pending in these regions and countries as well as in China,Hungary and Israel. Limitations on patent protection in these countries, andthe differences in what constitutes patentable subject matter in thesecountries outside the United States, may limit the protection we have onpatents issued or licensed to us outside of the United States. In addition,laws of foreign countries may not protect our intellectual property to the sameextent as would laws in the United States. To minimize our costs and expensesand to maintain effective protection, we focus our patent and licensingactivities on the EU, Canada 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 pendingas follows:

·        Nipent(registered in the Argentina, Austria, Australia, Bosnia-Herzegovina, Brazil,Benelux, Canada, Chile, Costa Rica, Czech Republic, Germany, Ecuador, ElSalvador, Estonia, France, Great Britain, Georgia, Greece, Guatemala, HongKong, Honduras, Ireland, Italy, Jamaica, Japan, Lithuania, Latvia, Nicaragua,Norway, New Zealand, Panama, Poland, Portugal, Paraguay, Romania, SlovakRepublic, South Africa, South Korea, Serbia-Montenegro, Switzerland, Taiwan,Ukraine, the United States and Uruguay; application pending in Mexico);

27

----

·        SuperGen  is registered in Australia, the EU, HongKong, Japan, Taiwan and the United States for use in pharmaceutical sales, andis the subject of pending applications for those goods in Canada and SouthKorea, as well as for manufacturing services in the United States;

·        Orathecinis registered in Australia and the EU; pending applications in Canada, Japanand the United States;

·        Dacogenis registered in Japan; pending applications in Australia, Canada, the EU andthe United States;

·        Mitozytrexis the subject of pending applications in Canada, Japan, the EU and the UnitedStates;

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

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

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

·        “Greenbubbles” logo is registered in the United States; pending applications inCanada and the EU.

**Competition**

The pharmaceuticalindustry in general and oncology sector in particular is highly competitive andsubject to significant and rapid technological change. There are manycompanies, both public and private, including well-known pharmaceuticalcompanies that are engaged in the development and sale of pharmaceuticalproducts for some of the applications that we are pursuing. Our competitors andprobable competitors include Aventis AG, Berlex Laboratories, Bristol-MyersSquibb Company, Eli Lilly & Co., Glaxo Smithkline, Novartis AG,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 and represent substantiallong-term competition for us. Some of our competitors have received regulatoryapproval of or are developing or testing product candidates that competedirectly with our product candidates. For example, while we received orphandrug status for Orathecin and there is currently no competitor in the oraldelivery market for the treatment of pancreatic cancer, there are approveddrugs for the treatment of pancreatic cancer, including gemcitabine by EliLilly. In addition, Berlex Laboratories’ fludarabine competes with Nipent inthe leukemia market and Dacogen faces competition from Pharmion’s Vidaza.

In addition, many of thesecompetitors, either alone or together with their customers, have significantlygreater experience than we do in developing products, undertaking pre-clinicaltesting and clinical trials, obtaining FDA and other regulatory approvals, andmanufacturing and marketing products. Accordingly, our competitors may succeedin obtaining patent protection, receiving FDA approval or commercializingproducts before we do. If we commence commercial product sales of our productcandidates, we will be competing against companies with greater marketing andmanufacturing capabilities, areas in which we have limited or no experience.See “*Factors Affecting Future Operating Results—If wefail to compete effectively against other pharmaceutical companies, ourbusiness will suffer*.”

Factors affectingcompetition in the pharmaceutical industry vary depending on the extent towhich the competitor is able to achieve a competitive advantage based onproprietary technology. If we are able to establish and maintain a significantproprietary position with respect to our proprietary products, competition willlikely depend primarily on the effectiveness of the product and the number,gravity and severity of its unwanted side effects as compared to alternativeproducts.

28

----

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 31,2004, we had 109 full-time employees. We use consultants and temporaryemployees to complement our staffing. Our employees are not subject to anycollective bargaining agreements, and we consider our relations with employeesto be good.

**Geographic Area Financial Information**

We operate in one businesssegment—human therapeutics. In 2004, 89% of our sales were made in the UnitedStates and 11% were made in the EU. In 2003 and 2002, 97% of our sales weremade in the United States and 3% in the EU.

**Available Information**

We are subject to theinformation requirements of the Securities Exchange Act of 1934 (the “ExchangeAct”). Therefore, we file periodic reports, proxy statements, and otherinformation with the Securities and Exchange Commission (“SEC”). Such reports,proxy statements, and other information may be obtained by visiting the PublicReference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549 orby calling the SEC at 1-800-SEC-0330. In addition, the SECmaintains a website (*www.sec.gov*)that contains reports, proxy and information statements, and other informationregarding issuers that file electronically.

Financial and otherinformation about us is available on our website at www.supergen.com.  We make available on our website, free ofcharge, copies of our annual report on Form 10-K, quarterly reportson Form 10-Q, current reports on Form 8-K, and amendmentsto those reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Exchange Act as soon as reasonably practicable after filing such materialelectronically or otherwise furnishing it to the SEC. Information on ourwebsite does not constitute a part of this annual report on Form 10-K.

**ITEM 2**. PROPERTIES.

Our principaladministrative facility is currently located in leased general office space,containing approximately 50,000 square feet, in Dublin, California, under alease that expires in November 2010. Our laboratory operations are locatedin a 10,000 square foot industrial building that we own in Pleasanton,California. We also possess a five year lease to a 20,000 square footoffice/warehouse space, adjacent to our laboratory facility, that is currently beingsubleased. We believe the above properties are suitable for our operations inthe foreseeable future.

**ITEM 3**. LEGAL PROCEEDINGS.

We are not currentlysubject to any pending material legal proceedings.

**ITEM 4**. SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS.

None

29

----

**PART II**

**ITEM5**. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS.

**Market for CommonStock**

Ourcommon stock trades on the Nasdaq National Market under the symbol “SUPG.” Thefollowing table sets forth the high and low sales information for our commonstock for each quarterly period in the two most recent fiscal years as reportedon the Nasdaq National Market:
| ** **                             | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|
| **2004**                               |       |     |       |    |       |
| Quarter ended  March 31, 2004     |       | $        | 14.14      |    | $          | 6.10 |   |
| Quarter ended  June 30, 2004      |       | 9.43     |       | 6.08    |       |
| Quarter ended  September 30, 2004 |       | 8.05     |       | 4.50    |       |
| Quarter ended  December 31, 2004  |       | 7.99     |       | 5.00    |       |
| **2003**                               |       |     |       |    |       |
| Quarter ended  March 31, 2003     |       | $        | 4.05       |    | $          | 2.10 |   |
| Quarter ended  June 30, 2003      |       | 7.24     |       | 2.77    |       |
| Quarter ended  September 30, 2003 |       | 8.65     |       | 4.11    |       |
| Quarter ended December 31,  2003  |       | 11.40    |       | 7.44    |       |

 

**Holders of Record**

As of March 4, 2005,there were 579 holders of record of the common stock and approximately 23,000beneficial 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 of Unregistered Securities**

None

30

----

**ITEM6**. SELECTED FINANCIAL DATA.

The information setforth below is not necessarily indicative of results of future operations andshould be read in conjunction with the financial statements and notes theretoappearing in Item 15 of Part IV of this report.
| ** **                                                          | ** ** | **Year ended December 31,**                                      | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                                                                        | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                          | ** ** | **(Amounts in thousands, except per share data)** | ** ** |
| **Consolidated Statement of  Operations Data:**                     |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Total revenue                                                       |       | $                                                                               | 31,993     |   | $ | 11,494 |   | $ | 15,269 |   | $ | 11,451 |   | $ | 7,089 |   |
| Cost of sales                                                       |       | 4,135                                                                           |       | 3,865 |   | 4,491 |   | 2,727 |   | 1,641 |   |
| Research and  development                                           |       | 23,978                                                                          |       | 26,312 |   | 29,895 |   | 47,833 |   | 31,387 |   |
| Selling, general  and administrative                                |       | 28,800                                                                          |       | 24,436 |   | 23,525 |   | 22,079 |   | 15,964 |   |
| Acquisition of  in-process research and development                 |       | —                                                                          |       | — |   | — |   | — |   | 1,585 |   |
| Loss from  operations                                               |       | (24,920                                                                         | )          | (43,119 | ) | (42,642 | ) | (61,188 | ) | (43,488 | ) |
| Other income  (expense)                                             |       | (21,940                                                                         | )          | (10,351 | ) | (6,829 | ) | 5,622 |   | 8,205 |   |
| Net loss                                                            |       | $                                                                               | (46,860    | ) | $ | (53,470 | ) | $ | (49,471 | ) | $ | (55,566 | ) | $ | (35,283 | ) |
| Basic and diluted  net loss per common share                        |       | $                                                                               | (1.04      | ) | $ | (1.56 | ) | $ | (1.52 | ) | $ | (1.69 | ) | $ | (1.04 | ) |
| Shares used to  compute basic and diluted net loss per common share |       | 44,953                                                                          |       | 34,276 |   | 32,542 |   | 32,925 |   | 33,822 |   |

 
| ** **                                                                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Balance Sheet Data:**                                                                           | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents, marketable securities, investments, and restricted cash and  investments |       | $                           | 67,047     |   | $ | 39,926 |   | $ | 39,982 |   | $ | 77,359 |   | $ | 133,815 |   |
| Other current  assets                                                                             |       | 22,444                      |       | 9,035 |   | 9,744 |   | 5,807 |   | 7,541 |   |
| Property, plant  and equipment, net                                                               |       | 3,635                       |       | 4,420 |   | 5,443 |   | 6,345 |   | 5,438 |   |
| Other assets                                                                                      |       | 1,531                       |       | 1,355 |   | 2,164 |   | 33,206 |   | 16,539 |   |
| Total assets                                                                                      |       | $                           | 94,657     |   | $ | 54,736 |   | $ | 57,333 |   | $ | 122,717 |   | $ | 163,333 |   |
| Convertible debt,  net of discounts                                                               |       | $                           | —     |   | $ | 13,593 |   | $ | — |   | $ | — |   | $ | — |   |
| Other current  liabilities                                                                        |       | 20,517                      |       | 11,821 |   | 7,548 |   | 12,752 |   | 10,221 |   |
| Non-current  liabilities                                                                          |       | 927                         |       | 2,475 |   | 1,783 |   | 2,167 |   | 3,167 |   |
| Stockholders’ equity                                                                         |       | 73,213                      |       | 26,847 |   | 48,002 |   | 107,798 |   | 149,945 |   |
| Total liabilities  and stockholders’ equity                                                  |       | $                           | 94,657     |   | $ | 54,736 |   | $ | 57,333 |   | $ | 122,717 |   | $ | 163,333 |   |
| Cash dividends  per share                                                                         |       | —                      |       | — |   | — |   | — |   | — |   |

 

31

----

**ITEM7**. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.

*Our disclosure and analysis in this section of thereport also contain forward-looking statements. When we use the words “anticipate,”“estimate,” “project,” “intend,” “expect,” “plan,” “believe,” “should,” “likely”and similar expressions, we are making forward-looking statements.Forward-looking statements provide our current expectations or forecastsof future events. In particular, these statements include statements such as:the likelihood receiving FDA approval of our NDA for Dacogen; the timing ofreceiving EMEA approval of our MAA filings for Orathecin and Dacogen; ourexpectations regarding milestone revenues under our agreement with MGI; ourestimates about becoming profitable; our forecasts regarding our research anddevelopment expenses; and our statements regarding the sufficiency of our cashto meet our operating needs. 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 including our ability to achieve the milestones that may entitle us toreceive royalty payments from MGI. Certain unknown or immaterial risks anduncertainties can also affect our forward-looking statements.Consequently, no forward-looking statement can be guaranteed and youshould not rely on these forward-looking statements. For a discussion ofthe known and material risks that could act our actual results, please see “FactorsAffecting Future Operating Results” in this section of the report. We undertakeno obligation to update any forward-looking statements, whether as a result ofnew information, future events or otherwise.*

**Overview**

We are a pharmaceutical company dedicated to the developmentand commercialization of therapies for solid tumors, hematologicalmalignancies, and blood disorders. Our strategy is to commercialize products byminimizing the time, expense and technical risk associated with drug researchthrough identifying and acquiring pharmaceutical compounds in the later stagesof development. Our primary objective is to become a leading supplier oftherapies for solid tumors, hematological malignancies, and blood disorders.

Since our incorporation in 1991 we have devoted substantiallyall of our resources to our product development efforts. Currently we havethree key compounds, Orathecin, Dacogen and Nipent, that are the focus of ourefforts.

*Orathecin.  *During January 2004, we submitted anNDA to the FDA for Orathecin. The filing was accepted by the FDA and indicateda target PDUFA date of November 26, 2004. At the request of the FDA, wesubmitted during November 2004 additional clinical data from a trial ofOrathecin as a first-line treatment for pancreatic cancer as well as newanalyses of data from the pivotal study in 2nd and 3rd line patients. The FDAclassified these data as a Major Amendment, which triggered an extension of thereview period by 90 days resulting in a revised target PDUFA date of February 26,2005. Based on further discussions and feed back with both the FDA andconsultants helping us dialog with the FDA it was determined the currentpackage for Orathecin was not sufficient to gain approval at this time in theUnited States and we announced the withdrawal of the NDA in January 2005. Duringthe 2005 first quarter we received the findings from the FDA and intend toreview these findings and determine the most appropriate course of action inthe future for Orathecin in the United States. During July 2004, wesubmitted a MAA seeking approval of Orathecin to the EMEA. EMEA proceduresgenerally provide that a decision on the Orathecin MAA will usually occurwithin 12 months of acceptance of submission which could result in a decisionby them in the second half of 2005. Our European filing for Orathecin remains 

32

----

on track and is notaffected by the withdrawal of the NDA for Orathecin in the United States. There can be no guarantee that the EMEA willapprove Orathecin.

*Dacogen.  *During March 2004, we reported resultsfrom our randomized Phase III study of Dacogen for injection as a treatment forMDS. In October 2004, we submitted a MAA seeking approval of Dacogen tothe EMEA. EMEA procedures generally provide that a decision on the Dacogen MAAwill usually occur within 12 months of acceptance of submission which couldresult in a decision by them in the second half of 2005 or early 2006. In November 2004,we submitted an NDA to the FDA for Dacogen. Thefiling was accepted at the end of 2004 by the FDA and indicated a target PDUFAdate of September 1, 2005. There can be no guarantee that the FDA or EMEAwill approve Dacogen. During September 2004, we executed adefinitive agreement 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 usup to $45.0 million in specific regulatory and commercialization milestones. IfDacogen is approved, we could receive a royalty on worldwide net sales startingat 20% and escalating to a maximum of 30%. MGI has also committed to fundfurther development costs associated with Dacogen at a minimum of $15.0 millionover a three year period.

*Nipent.  *Nipentis approved by the FDA and EMEA for the treatment of hairy cell leukemia and ismarketed by us in the United States and Europe. Nipent has also shown promise in other diseases and we are conducting aseries of post-marketing Phase IV clinical trials for CLL, NHL, cutaneous andperipheral T-cell lymphomas and GvHD.

*Other Products.  *Ourportfolio of other products includes Partaject-delivered busulfan, andinhaled versions of Orathecin and paclitaxel. We also market Surface Safe. Wehave also received regulatory approval to market our generic daunorubicin for avariety of acute leukemias and Mitozytrex (mitomycin for injection), for use inthe therapy of disseminated adenocarcinoma of the stomach or pancreas in provencombinations with other approved chemotherapeutic agents and as palliativetreatment when other modalities have failed. Moreover, we hold United Statessales and marketing rights to the cancer vaccine Avicine. We are continuallyevaluating our product portfolio to determine whether it is appropriate for usto dedicate the resources needed to commercialize these products ourselves orwhether we would be better served selling or licensing the rights to developthese products to third parties.

To date, our product revenues have been limited andare derived primarily from sales of Nipent, which we are marketing in theUnited States and distributed in Europe for the treatment of hairy cellleukemia. Most of our products are still in the development stage, and we willrequire substantial additional investments in research and development,clinical trials, and in regulatory and sales and marketing activities tocommercialize current and future product candidates. Conducting clinical trialsis a lengthy, time-consuming, and expensive process involving inherentuncertainties and risks, and our studies may be insufficient to demonstratesafety and 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 $333.5 million through December 31, 2004, andhave never generated enough funds through our operations to support ourbusiness. We expect to continue to incur operating losses at least through2006.

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, if approved, increases in sales and marketing expenses related to thelaunch of new products and our ability to control our costs and operatingexpenses. If the results from our clinical trials are not positive, we may notbe able to get sufficient funding to continue our trials or conduct new trials,and we would be forced to scale down or cease our business operations. Moreover,if our products are not approved or commercially accepted we 

33

----

willremain unprofitable for longer than we currently anticipate. Additionally, wemight be forced to substantially scale down our operations or sell certain ofour assets, and it is likely the price of our stock would declineprecipitously.

**Critical AccountingPolicies**

Our management discussion and analysis of our financialcondition and results of operations is based upon our consolidated financialstatements, 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 about thecarrying values of assets and liabilities that are not readily apparent fromother 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.

*Revenue Recognition*

Our net sales relate principally to Nipent and, to alesser extent, mitomycin. We recognize sales revenue upon shipment and relatedtransfer of title to customers, and collectibility is reasonably assured.Allowances are established for estimated product returns and exchanges.

Allowances for product returns and exchanges are basedon historical information and known trends from external sources. The costs ofproduct exchanges, which include actual product costs and related shippingcharges, are included in cost of sales. In estimating returns, we analyzehistorical returns and sales patterns, the remaining shelf life of inventory,and changes in demand. We continually assess our historical experience andadjust our allowances as appropriate. If actual product returns and exchangesare greater than our estimates, additional allowances may be required.

Cash advance paymentsreceived in connection with distribution agreements, license agreements, orresearch grants are deferred and recognized ratably over the period of therespective agreements or until services are performed. We recognize costreimbursement revenue under collaborative agreements as the related researchand development costs are incurred. We recognize milestone fees upon completionof specified milestones according to contract terms. Deferred revenuerepresents the portion of research payments received that has not been earned.

*Intangible Assets*

We have intangible assetsrelated to goodwill and other acquired intangibles such as trademarks,covenants not to compete, and customer lists. The determination of relatedestimated useful lives and whether or not these assets are impaired involvessignificant judgment. Changes in strategy and/or market conditions couldsignificantly impact these judgments and require adjustments to recorded assetbalances. We review intangible assets, as well as other long-lived assets, forimpairment whenever events or circumstances indicate that the carrying amountmay not be fully recoverable.

34

----

*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 our June 2003convertible debt transaction, we issued to the note holders warrants topurchase 2,634,211 shares of common stock of AVI at $5.00 per share. As of December 31,2004, we owned sufficient shares of AVI to cover the potential obligation.These warrants are considered to be a derivative and have been recorded on thebalance sheet at fair value. The accounting for derivatives is complex, andrequires significant judgments and estimates involved in determining the fairvalue in the absence of quoted market values. These estimates are based onvaluation methodologies and assumptions deemed appropriate in thecircumstances. The fair value of the warrants is based on various assumptionsinput into the Black-Scholes pricing model. Such assumptions include theestimated market volatility and interest rates used in the determination offair value. The use of different assumptions may have a material effect on theestimated fair value amount and the results of operations.

**Results ofOperations**

***Year ended December 31,2004 compared with year ended December 31, 2003:***
| ***Revenues***                   | ** ** | ** **              | ** ** | ** ** | ** ** | **Change** | ** ** |
|----------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                       | ** ** | **2004**                | ** ** | **2003**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                       | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Net product  revenues            |       | $                       | 13,127     |       | $          | 11,437     |       | $ | 1,690 |   |   | 14.8 | % |   |
| Development and  license revenue |       | 18,866                  |       | —     |       | 18,866     |       |   | — |   |   |
| Other revenue                    |       | —                  |       | 57         |       | (57        | )          |   | — |   |   |
|                                  |            |                         |            |            |            |            |            |  |  |  |  |  |  |  |

 

The increase in net product revenues in 2004 was dueprimarily to a 16% increase in sales of Nipent, our drug currently approved forthe treatment of hairy cell leukemia, due to an increase in demand and higherproduct pricing resulting from our acquisition of European marketing rights forNipent in 2004. Sales in 2004 included approximately $1.5 million in sales toEurope, compared to $315,000 in 2003. Unlike our Nipent sales efforts in theU.S. market where we call on clinicians directly, our role in Europe iscurrently limited to that of a supplier. As such, we have not had a directinfluence on Nipent sales at the clinical level, making their timing andmagnitude difficult to predict and dependent on the efforts of our Europeandistributor.

35

----

Theincrease in development and license revenue relates to our license agreemententered into with MGI PHARMA, Inc. in September 2004. Development andlicense revenue consisted of $12.5 million in milestone payments relating tothe filing of Dacogen with the FDA and EMEA, $3.6 million for Dacogendevelopment, and $2.7 million in amortization of deferred revenue in connectionwith the upfront payment received from MGI.
| *Costs and operating expenses* | ** ** | ** **         | ** ** | ** ** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **2004**           | ** ** | **2003**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Cost of sales                                 |       | $                  | 4,135      |       | $          | 3,865      |       | $ | 270 |   |   | 7.0 | % |   |
| Research and  development                     |       | 23,978             |       | 26,312     |       | (2,334     | )          |   | (8.9 | ) |   |
| Selling, general and  administrative          |       | 28,800             |       | 24,436     |       | 4,364      |       |   | 17.9 |   |   |
|                                               |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |

 

Cost of sales as a percentage of net product revenueswas 32% in 2003 compared to 34% in 2002. The decrease in cost of salespercentage is due primarily to higher pricing of Nipent in Europe due to ouracquisition of European marketing rights for Nipent in 2004. Current marginsmay not be indicative of future margins due to possible variations in productmix, average selling prices, and manufacturing costs.

The decrease in research and development expenses wasdue primarily to lower expenditures relating to our clinical studies ofOrathecin, which declined by $1.8 million in 2004 over 2003, and Nipent, whichdeclined by $424,000, offset by increases in clinical trial expenses forDacogen of $609,000. We substantially completed our Orathecin Phase III studiesin 2004 and filed an NDA with the FDA in January 2004. Our clinicalstudies for Dacogen continued through 2004, culminating with our filing of anNDA with the FDA and an MAA with the EMEA in late 2004.

We conduct research internally and also throughcollaborations 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.Our major research and development projects have included Orathecin, Dacogen,and studies of other indications of Nipent. We have focused much of ourattention and resources on developing Orathecin, and from 1998 through 2004, wehave spent approximately $69.9 million on the Orathecin program. From 2000through 2004, we have spent approximately $14.5 million on the development ofand clinical studies related to Dacogen, and from 1998 through 2004, we havespent approximately $11.3 million on Phase I, II/III, and Phase IVprograms related to different indications of Nipent. Conducting clinical trialsis a lengthy, expensive and uncertain process. Completion of clinical trialsmay take several years or more. The length of time generally variessubstantially according to the type, complexity, novelty and intended use ofthe product candidate. 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. We may encounter problems in our studies which willcause us or the FDA to delay or suspend the studies. Because of theseuncertainties, we cannot predict when or whether we will successfully completethe development of our product candidates or the ultimate product development cost.

36

----

Theincrease in selling, general and administrative expenses consists of anincrease in sales and marketing expenses of approximately $3.8 million and an increasein general and administrative expenses of $0.5 million. The increase in salesand marketing expenses related primarily to expenditures for market research,speakers programs, advertising placement, and conferences and symposiumsassociated with pre-launch activities for Orathecin and Dacogen. In connectionwith our license agreement with MGI we are being reimbursed for approximately$1.0 million of the sales and marketing expenses for Dacogen in 2004.
| *Other income (expense)*                   | ** ** | ** **         | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                                           | ** ** | **2004**           | ** ** | **2003**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                           | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Interest income                                      |       | $                  | 624        |       | $          | 474        |       | $ | 150 |   |   | 31.6 | % |   |
| Interest expense                                     |       | (2,338             | )          | (3,981     | )          | (1,643     | )          |   | (41.3 | ) |   |
| Amortization of deemed  discount on convertible debt |       | (12,657            | )          | (13,738    | )          | (1,081     | )          |   | (7.9 | ) |   |
| Other than temporary  decline in investments         |       | (7,851             | )          | —     |       | 7,851      |       |   | — |   |   |
| Change in valuation of  derivatives                  |       | 282                |       | 6,894      |       | (6,612     | )          |   | (95.9 | ) |   |
|                                                      |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |

 

The increase in interest income is due to higheravailable cash balances due to a private placement of our common stock in March 2004with net proceeds of $32.5 million and the stock purchase and licenseagreements with MGI in September 2004 with net proceeds of $36.8 million.

Interest expense in 2004 declined due to the decliningbalance of our convertible notes entered into in two transactions in February andJune 2003. The convertible notes were fully repaid at December 31, 2004,primarily through the issuance of our common stock.

Amortization of deemed discounton convertible debt declined as our convertible notes from the February 2003transaction were fully repaid in February 2004 and the notes from June 2004were repaid by December 2004.

During 2004, we recorded another than temporary decline in the value of our investment in the stock of AVI.We did not incur any other than temporary declines in the value of ourinvestments in 2003.

Income related to thechange in derivative valuation in 2003 represented the change in the valuationof two separate derivatives. In our February 2003 exchangeable convertibledebt transaction, the notes contained a feature that allowed holders of thenotes to receive a portion of the principal and interest in 2,634,211 shares ofAVI at $5.00 per share. The initial value ascribed to this derivative was $2.3million. The ability of the note holders to exchange the notes into shares ofAVI was eliminated in our June 2003 convertible debt transaction, so theentire derivative value at that time of $2.5 million was taken to other income.As part of the June 2003 convertible debt transaction and the February Notesrestructuring, we issued to the note holders warrants to purchase 2,634,211shares of AVI at $5.00 per share. These warrants represent a derivativeinstrument and were valued at $10.1 million using the Black-Scholes pricingmodel on June 24, 2003. Through December 31, 2003, the value of thisderivative had decreased by $4.6 million, which was recorded as other income. As the fair value of the common stock of AVI hasfluctuated significantly in the past two years and is expected to do so in thefuture given the volatility of the AVI stock, the valuation of the derivativein future periods may have a significant impact on our results of operations. AtDecember 31, 2004, the value of this derivative had declined by $3.9million, which was recorded as other income. This amount was reduced by acharge of $3.6 million relating to the derivative accounting treatment ofinitially unregistered warrants issued in connection with the private placementof shares of our common stock in March 2004.

37

----

***Year ended December 31, 2003 compared with yearended December 31, 2002:***
| *Revenues*            | ** ** | ** **         | ** ** | ** ** | ** ** | **Change** | ** ** |
|-----------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **            | ** ** | **2003**           | ** ** | **2002**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **            | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Net product  revenues |       | $                  | 11,437     |       | $          | 14,188     |       | $(2,751 | ) |   | (19.4 | )% |   |
| Other revenue         |       | 57                 |       | 1,081      |       | (1,024     | )          |   | (94.7 | ) |   |
|                       |            |                    |            |            |            |            |            |  |  |  |  |  |  |

 

Thedecrease in net product revenues in 2003 was due primarily to lower sales ofNipent, our drug currently approved for the treatment of hairy cell leukemia. Nipentsales were $10.1 million in 2003 compared to $12.6 million in 2002.  The decline in Nipent sales was due to anincrease in wholesaler purchases prior to a price increase that went intoeffect at the beginning of the fourth quarter 2003, which resulted in asignificant decline in sales in the fourth quarter, which traditionally hadbeen a high-volume quarter. In addition, the price increase had an impact onthe average wholesale price, a key determining factor in Medicarereimbursement, and resulted in lower than expected demand for Nipent as thereimbursement for Nipent was impacted. Sales in 2003 included approximately$315,000 in sales to Europe, compared to $400,000 in 2002. Unlike our Nipentsales efforts in the U.S. market where we call on clinicians directly, our rolein Europe is currently limited to that of a supplier. As such, we did not havea direct influence on Nipent sales at the clinical level, making their timing andmagnitude difficult to predict and dependent on the efforts of our Europeandistributor.
| *Costs and operating expenses* | ** ** | ** **         | ** ** | ** ** | ** ** | **Change** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **2003**           | ** ** | **2002**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Cost of sales                                 |       | $                  | 3,865      |       | $          | 4,491      |       | $ | (626 | ) |   | (13.9 | )% |   |
| Research and  development                     |       | $                  | 26,312     |       | $          | 29,895     |       | $ | (3,583 | ) |   | (12.0 | ) |   |
| Selling, general and  administrative          |       | $                  | 24,436     |       | $          | 23,525     |       | $ | 911 |   |   | 3.9 |   |   |

 

Cost of sales as a percentage of net product revenueswas 34% in 2003 compared to 32% in 2002. The increase in cost of salespercentage in 2003 was due to a larger portion of our sales being related togeneric mitomycin, which was sold at lower margins than Nipent. In addition,raw material costs for mitomycin increased in 2003.

The decrease in research and development expenses wasdue primarily to lower expenditures relating to our Phase I/II and Phase IIIclinical trials of Orathecin, which declined by $3.6 million in 2003 over 2002.Most of our Phase I/II studies of Orathecin in various indications werecompleted in late 2002. In addition, we completed enrollment of over 1,800patients into the three Phase III Orathecin trials for pancreatic cancer in2001, and the expenditures for these trials continued to decline as patientscompleted the studies. Although the Phase III clinical trials for Dacogenincreased by $0.7 million from 2002 to 2003, the Phase III trialsconducted for Dacogen have not been as costly as the Orathecin trials.

We conduct research internally and also throughcollaborations 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.Our major research and development projects include Orathecin, Dacogen, andstudies of other indications of Nipent. We have focused much of our attentionand resources on developing Orathecin, and from 1998 through 2003, we havespent approximately $65.0 million on the Orathecin program. From 2000 through2003, we have spent approximately $7.9 million on the development of andclinical studies related to Dacogen, and from 1998 through 2003, we have spentapproximately $12.5 million on Phase I, II/III, and Phase IV programsrelated to different indications of Nipent.

38

----

Theincrease in selling, general and administrative expenses consists of anincrease in general and administrative expenses of $1.6 million, offset bydecreases in sales and marketing expenses of approximately $0.7 million. Thedeclines in sales and marketing expenses were attributed to lower salaries andbonuses, due to staff attrition that has not yet been replaced, as well asreduced spending on trade shows and conferences. The increase in general andadministrative expenses was due to higher administrative salaries and bonuses,which included non-cash charges for stock compensation related to themodification of and acceleration of stock options associated with the change instatus or departure of certain management, higher costs for investor relationsand business development activities, and $0.6 million relating to the write offof one of our equity investments.
| *Other income (expense)*                   | ** ** | ** **         | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                                           | ** ** | **2003**           | ** ** | **2002**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                           | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Interest income                                      |       | $                  | 474        |       | $          | 1,662      |       | $ | (1,188 | ) |   | (71.5 | )% |   |
| Interest expense                                     |       | (3,981             | )          | —     |       | 3,981      |       |   | — |   |   |
| Amortization of  deemed discount on convertible debt |       | (13,738            | )          | —     |       | 13,738     |       |   | — |   |   |
| Change in  valuation of derivatives                  |       | 6,894              |       | —     |       | 6,894      |       |   | — |   |   |
| Other than temporary  decline in investments         |       | —             |       | (8,491     | )          | (8,491     | )          |   | — |   |   |
|                                                      |            |                    |            |            |            |            |            |  |  |  |  |  |  |  |

 

The decrease in interest income was due to loweravailable cash and marketable securities balances and a decline in interestrates in 2003.

Interest expense in 2003 included  $3.1 million of amortization of prepaidfinancing costs, and $0.9 million in interest incurred on the 4% interestbearing convertible debt issued in February and June 2003. Non-cashamortization of deemed discount on the convertible debt was $13.7 million.. Nosuch amounts were recorded in 2002 as there was no debt issued in 2002.

Income related to the change in derivative valuationrepresents the change in the valuation of two separate derivatives. In our February 2003exchangeable convertible debt transaction, the February Notes contained afeature that allowed holders of the notes to receive a portion of the principaland interest in 2,634,211 shares of AVI at $5.00 per share. The initial valueascribed to this derivative was $2.3 million. The ability of the note holdersto exchange the notes into shares of AVI was eliminated in our June 2003convertible debt transaction, so the entire derivative value at that time of$2.5 million was taken to other income. As part of the June 2003convertible debt transaction and the February Notes restructuring, 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 werevalued at $10.1 million using the Black-Scholes pricing model on June 24,2003. Through December 31, 2003, the value of this derivative haddecreased by $4.6 million. This change in value has been recorded as otherincome in 2003. As the fair value of thecommon stock of AVI has fluctuated significantly in the past two years and isexpected to do so in the future given the volatility of the AVI stock, thevaluation of the derivative in future periods may have a significant impact onour results of operations.

During2002, we recorded an other than temporary decline in the value of ourinvestments in the stocks of AVI, Peregrine Pharmaceuticals, Inc., andInflazyme, Inc. We did not incur any similar other than temporary decline in the value of our investmentsin 2003.

**Liquidity andCapital Resources**

Our cash, cash equivalents, and both short andlong-term marketable securities totaled $56.8 million at December 31,2004, compared to $14.6 million at December 31, 2003. In addition, weheld 2,684,211 shares of registered stock of AVI, most of which are held assecurity for the warrants we issued to convertible debt holders to purchase the2,634,211 AVI shares at $5.00 per share. The AVI shares had a 

39

----

market value of$6.2 million at December 31, 2004, and are classified on the balancesheet under non-current “Restricted cash and investments.”

The net cash used in operating activities in 2004 was$24.5 million, which consisted primarily of the net loss of $46.9 million, plus$2.7 million in amortization of deferred revenue and an increase of accountsreceivable of $17.2 million, less depreciation of $1.1 million, amortization ofprepaid financing costs of $1.8 million, amortization of deemed discount onconvertible debt of $12.7 million, an other than temporary decline in the valueof investments of $7.9 million, and increases in prepaid expenses of $1.0million, accounts payable of $1.1 million, and deferred revenue of $13.1million. The net cash used in operating activities in 2003 was$36.8 million, which consisted primarily of the net loss of$53.5 million, less $13.7 million non-cash amortization of deemeddiscount on our convertible debt, $3.1 million amortization of prepaidfinancing costs, $1.2 million in depreciation expense, and $4.9 million declinein accounts receivable, offset by $6.9 million non-cash change in thevaluation of derivatives. The net cash used in operating activities in 2002 was$47.7 million, which consisted primarily of the net loss of$49.5 million, an increase in accounts receivable of $2.9 million andthe reduction of accounts payable and other liabilities totaling$4.6 million, offset by the other than temporary decline in value ofinvestments of $8.5 million.

Net cash provided by investing activities was $131,000in 2004, which consisted primarily of $28.3 million in proceeds from the sales ormaturities 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 cashused in investing activities in 2003 was $5.0 million, which consistedprimarily of $10.6 million raised in our June convertible debttransaction that was transferred to a cash collateral account, and purchases ofmarketable securities of $8.1 million, offset by sales and maturities ofmarketable securities of $13.9 million. Net cash provided by investingactivities in 2002 was $39.8 million, and primarily related to the salesand maturities of marketable securities of $72.7 million, net of purchases of$32.5 million.

Net cash provided by financing activities was $57.7million, which consisted solely of proceeds from the issuance of common stock,net of issuance costs. Net cash provided by financing activities was$39.6 million in 2003, due primarily to the issuance of a total of $42.5 millionin convertible notes in separate transactions in February and June 2003,offset by the payment of $3.4 million in prepaid financing costs. Net cashused in financing activities was $2.6 million in 2002, and relatedprimarily to issuances and repurchases of our common stock.

*February 2003 NotesFinancing.  *On February 26, 2003 we entered into aSecurities Purchase Agreement for the private placement of Senior ExchangeableConvertible Notes (“February Notes”) in the principal amount of $21.25million. The February Notes accrued interest at a rate of 4% per year. Theprincipal amount of the February Notes was repayable in four equalquarterly 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. Inconnection with the issuance of the February Notes, we also issuedwarrants to the note holders for the purchase of an aggregate of 1,997,500shares of our common stock. These warrants will be exercisable for a term offive years at an exercise price of $5.00 per share.

*June 2003 Notes Financing and February NotesRestructuring.  *On June 24, 2003, we closed aprivate placement transaction in which we issued the June Notes, in theaggregate principal amount of $21.25 million, to the same holders of ouroutstanding February Notes. The June Notes were payable in four equalquarterly installments beginning March 31, 2004, and accrued interest at arate of 4% per year. Pursuant to the terms of the June Notes, the noteholders could elect to convert, at any time prior to maturity, their June Notesinto shares of our common stock at a fixed price of $6.36. We could also electto 

40

----

pay the principal andinterest then due under the June Notes, subject to certain conditions,through the issuance of shares of our common stock at a conversion price equalto: (a) with respect to the interest payment, 95% of the arithmeticaverage of the weighted average price of our common stock on each of the fiveconsecutive trading days immediately preceding payment and (b) withrespect to the principal payment, as of any date of determination, 90% of thearithmetic average of the weighted average price of our common stock on any15 trading days designated by the note holders during the 20 tradingdays immediately preceding such date. In addition, the note holders had a rightof first refusal to purchase their pro rata portion of the greater of one-thirdof the securities offered by us for sale or $5.0 million worth of suchoffered securities.

Concurrent with the issuance of the June Notes,we restructured our outstanding February Notes. Pursuant to therestructuring, the holders of the February Notes converted half of theprincipal amount ($10.6 million) plus accrued and unpaid interest thereon intoshares of our common stock at the fixed conversion price of $4.25, therebycausing the remaining $10.6 million principal amount of the outstanding February Notesto have a final maturity date of February 26, 2004. The remaining February Noteswere amended to remove the feature permitting the holders to exchange suchnotes into the AVI shares at an exchange price of $5.00, and to remove ourability to use the AVI shares valued at market at the time of repayment torepay the outstanding principal amount.

In addition, in connection with the issuance of the June Notesand the restructuring of the February Notes, we issued to the note holderswarrants to purchase the 2,634,211 AVI shares at an exercise price of $5.00 pershare.

During the years ended December 31, 2004 and2003, we issued 4.8 million and 3.9 million shares of our common stock,respectively, in payment of principal and interest on the February and June Notes.As of December 31, 2004, all principal from both the February Notesand June Notes was repaid.

*March 2004 Private Placement*.   OnMarch 5, 2004, we entered into a Securities Purchase Agreement withseveral investors for the private placement of shares of unregistered commonstock and warrants. In connection with this agreement, we issued 4.9 millionshares of our common stock to the investors at a per share price of $7.00, foran aggregate purchase amount of $34.3 million, and warrants to purchase 735,000shares of our common stock. The warrants have a term of five years and a pershare exercise price of $10.00. As compensation to the placement agent, we paidthe placement agent $1.7 million in cash, which was treated as part of the costof the offering. Net proceeds from the offering were $32.5 million.

*Stock Purchase and License Agreements with MGIPHARMA, Inc.  *In September 2004, we executed aStock Purchase Agreement and License Agreement with MGI. In accordance with theStock Purchase Agreement, we issued 4 million shares of our common stockto MGI at $10.00 per share, for aggregate proceeds totaling $40.0 million. Inconnection with this transaction, we paid the placement agent, The KriegsmanGroup, $3.2 million in cash and issued Kriegsman a warrant exercisable for400,000 shares of our common stock at an exercise price of $10.00 per share.

Ourcontractual obligations as of December 31, 2004 are as follows (inthousands):
| ** **                                                           | ** ** | **Payments Due by Period**                                         | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **      Total      ** | ** ** | **  < 1 year  ** | ** ** | **  1-3 years  ** | ** ** | **  4-5 years  ** | ** ** | **After 5 years** | ** ** |
| Operating leases,  net                                               |       |                                                                              | $          | 13,327 |   |   |   | $ | 2,114 |   |   |   | $ | 6,700 |   |   |   | $ | 4,513 |   |   |   | $ | — |   |   |
| Long term  obligations—contractually obligated research funding |       |                                                                              | 1,675      |   |   |   | 325 |   |   |   | 1,045 |   |   |   | 295 |   |   |   | 10 |   |   |
| Total contractual cash  obligations                                  |       |                                                                              | $          | 15,002 |   |   |   | $ | 2,439 |   |   |   | $ | 7,745 |   |   |   | $ | 4,808 |   |   |   | $ | 10 |   |   |

 

41

----

The operating lease obligations noted above are net ofsublease income of $340,000. The contractually obligated research funding notedabove consists primarily of required payments to Peregrine, RTP Pharma and TheClayton Foundation. We are also obligated to potentially spend up to$88.0 million in milestone and development related payments to AVI andPeregrine for development of Avicine and VEGF technologies, respectively. Weare unable to determine precisely when and if our payment obligations under ouragreements with AVI and Peregrine will become due as these obligations arebased on milestone events the achievement of which is subject to a significantnumber of risks and uncertainties. Because some of the milestone events arerevenue-related and payment obligation would not be triggered absent ourreceipt of revenues from the relationship, we may be able to use fundsgenerated from these relationships to make the milestone payments.

We have financed our operations primarily through theissuance of equity and debt securities and the receipt of milestone payments inconnection with collaborative agreements. We believe that our current cash,cash equivalents, marketable securities and other investments will satisfy ourcash requirements through at least December 31, 2005. We may pursueadditional financing options, including the selling of additional shares ofstock 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. Wecontinue to actively consider future contractual arrangements that wouldrequire significant financial commitments. If we experience currentlyunanticipated cash requirements, we could require additional capital muchsooner than presently anticipated. We may raise money by the sale of our equitysecurities or debt, or the exercise of outstanding warrants and stock optionsby the holders of such warrants or options. However, given uncertain marketconditions and the volatility of our stock price, we may not be able to sellour securities 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, 2005.

**Related PartyTransactions**

*EuroGenPharmaceuticals Ltd.*

In September 2001, weentered into a Supply and Distribution Agreement with EuroGenPharmaceuticals Ltd., a company incorporated and registered in England andWales. The agreement was based on arm’s length negotiation between the parties.Under the agreement, we granted EuroGen the exclusive European and SouthAfrican rights to promote and sell certain of our existing generic and otherproducts or compounds. The agreement also establishes a process for grantingEuroGen rights to sell additional products in Europe and South Africa, subjectto our compliance with our other then existing licensing and distributionarrangements. After complying with these existing obligations, we will berequired to offer EuroGen the option to obtain European and South Africanrights to our future products. EuroGen will seek and pay for all regulatoryapprovals and authorizations necessary for the commercial sale of the productsin the territories where they market and sell the products. During 2001 weloaned EuroGen $260,000 under a line of credit arrangement designed to coverstart-up expenses. During 2002, we advanced an additional $646,000 to EuroGento fund its operations. In December 2002, all but one of the otherinvestors in EuroGen withdrew their ownership interests in the entity, and webecame 95% owners of EuroGen. Larry Johnson, the president and chief executiveofficer of EuroGen, owns the remaining 5%. The amounts advanced to EuroGen,including the amounts advanced in 2001, totaling $906,000 were charged toSelling, general, and administrative expense in 2002. In 2003 and 2004, the 

42

----

resultsof EuroGen are included in our consolidated operations in Selling, general andadministrative expenses. During the years ended December 31, 2004 and2003, we have recorded expenses of $2,269,000 and $325,000, respectively,related to the EuroGen.

*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., a start-up biotech company, and in March 2003 weinvested an additional $30,000 to acquire 15,000 shares. The president andchief executive officer of KineMed is one of our former directors. Our currentpresident and chief executive officer is a member of the board of directors ofKineMed. We have accounted for this investment under the cost method as ourownership is less than 20 percent of KineMed’s outstanding shares. Thisinvestment is included on the balance sheet in Investment in stock of relatedparties.

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 etiocholandione and etiocholanolone compounds. Underthe terms of the license agreement and upon successful commercialization wecould earn future royalty revenue on worldwide sales. In addition, we havetermination rights and rights of first refusal on new oncological uses.

*AVI BioPharma, Inc.*

In December 1999, we entered into an agreementwith AVI. At the time, the chief executive officer of AVI was a member of ourboard of directors. He later resigned from our board in May 2002. Ourformer president and chief executive officer was a member of the board ofdirectors of AVI through March 2004. The transaction was approved bymembers of our board of directors who had no interest in the transaction andevaluated the transaction with input from members of our financial andscientific staffs. We currently own 2,684,211 shares of AVI common stock.

Under the terms of the agreement, we acquired onemillion shares of AVI common stock, which amounted to approximately 7.5% of AVI’soutstanding common stock, for $2.5 million cash and 100,000 shares of ourcommon stock at $28.25 per share. We also acquired exclusive negotiating rightsfor the United States market for Avicine, AVI’s proprietary cancer vaccine currentlyin late-stage clinical testing against a variety of solid tumors. Avicine is animmunotherapy that neutralizes the effect of a tumor-associated antigenon cancer cells, while stimulating the body’s immune system to react againstthe foreign tumor.

In July 2000, we finalized an agreement with AVIto obtain the United States marketing rights for Avicine. We issued 347,826shares of our common stock along with $5.0 million in cash to AVI aspayment for our investment, in exchange for 1,684,211 shares of AVI commonstock. As part of this agreement, we obtained the right of first discussion toall of AVI’s oncology compounds and an option to acquire an additional 10% ofAVI’s common stock for $35.625 per share. This option is exercisable for athree-year period commencing on the earlier of the date the FDA accepts forfiling the NDA submitted for Avicine or the date on which the closing price ofAVI’s common stock exceeds the option exercise price. Our ownership is lessthan 20% of AVI’s outstanding shares. The investment is classified asavailable-for-sale. No value has been ascribed to the option as neither of themeasurements have been achieved as of December 31, 2004.

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 $80.0 million. In 2003 and 2002, we recorded$144,000 and $421,000, respectively, in research 

43

----

anddevelopment expenses for Avicine. At December 31, 2004, the sum of theseexpenses, or $565,000, was still payable and is presented on the balance sheetas Payable to AVI BioPharma, Inc.

*Quark Biotech, Inc.*

Our current president/chief executive officer and ourformer president/chief executive officer are directors and stockholders ofQuark Biotech, Inc. (“QBI”), a privately-held development stagebiotechnology company. In June 1997, we made an equity investment of$500,000 in QBI’s preferred stock, which represents less than 1% of QBI’soutstanding shares as of December 31, 2001. Our investment in QBI iscarried at cost and is included in Investment in stock of related parties.

In January 2002, wesubleased a portion of our laboratory space to QBI. During 2003 and 2002, wecollected $56,000 and $123,000, respectively, in sublease income from QBI. Theinitial term of the sublease expired on December 31, 2002, but wecontinued to sublease the space to QBI on a month-to-month basis until August 2003.

*The Kriegsman Group*

In March 2001, weretained The Kriegsman Group to render advice and assistance with respect tofinancial public relations and promotions. In addition, in connection with suchservices, on March 22, 2001, we issued three warrants to The KriegsmanGroup, two of which are still outstanding, and as amended in February 2003,the terms of the warrants are as follows: the “A” warrant for the purchase of200,000 shares of common stock is exercisable at the exercise price of $10.47per share and will expire in February 2006, and the “C” warrant for thepurchase of 100,000 shares of common stock is exercisable at the exercise priceof $10.47 per share and will expire in February 2007. On July 25,2002, our former president and chief executive officer became a member of theboard of directors of CytRx Corp. Steven Kriegsman, the president of TheKriegsman Group, is also a significant shareholder and president and chiefexecutive officer of CytRx Corp. We paid The Kriegsman Group consulting fees of$220,000 in 2003 and $240,000 in 2002. In 2004, The Kriegsman Group acted as the placement agent in our stockpurchase and license agreements with MGI PHARMA, Inc., and we paidKriegsman $3.2 million in cash and issued Kriegsman a warrant exercisable for400,000 shares of our common stock at an exercise price of $10.00 per share. Thewarrant will be exercisable for a term of five years, and we have registeredfor resale the common stock issuable upon exercise of the warrant. Wecalculated the fair value of the warrant issued to Kriegsman at $1,436,000,using the Black-Scholes model.

*FamilyRelationships*

We employ a number ofindividuals who are immediate family members of Dr. Joseph Rubinfeld, ourformer president and chief executive officer, who also served as chiefscientist and chairman emeritus during 2004. None of these family members areour officers or directors. Dr. Rubinfeld resigned as chief scientist andchairman emeritus in January 2005.

**Recently IssuedAccounting Standards**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards123R, “Share-Based Payment—An Amendment of FASB Statements No. 123 and 95”(“SFAS 123R”), which eliminated the ability to account for share-basedcompensation transactions using APB 25. SFAS 123R will instead requirecompanies to recognize compensation expense, using a fair-value based method,for costs related to share-based payments including stock options and employeestock purchase plans. SFAS 123R is effective for public companies in periodsbeginning after June 15, 2005. We will be required to implement thestandard no later than the quarter that begins July 1, 2005. Thecumulative effect of adoption, if any, applied on a modified prospective basis,would be 

44

----

measured and recognized onJuly 1, 2005. Current estimates of option values using the Black Scholesmethod (as shown above) may not be indicative of results from valuationmethodologies ultimately adopted. The adoption of SFAS 123R will have amaterial impact on our results of operations. We are currently evaluating whichmethod we will use to adopt SFAS123R.

In March 2004, theFASB approved Emerging Issues Task Force (EITF) Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.”  The objective of thisissue is to provide guidance for identifying other-than-temporarily impairedinvestments. EITF No. 03-1 also provides new disclosure requirementsfor investments that are deemed to be temporarily impaired. In September 2004,the FASB issued EITF No. 03-1-1, which delayed the effective dateof EITF No. 03-1, with the exception of certain disclosurerequirements. We do not believe that the adoption of EITF No. 03-1will have a material impact on our financial condition and results ofoperations.

**Income Taxes**

As of December 31,2004, we have net operating loss carryforwards for federal income tax purposesof approximately $295.0 million which expire in the years 2005 through 2024,and federal research and development credit carryforwards of approximately $5.5million, which expire in the years 2008 through 2023.

**Factors AffectingFuture Operating Results**

*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 trading price of our commonstock could decline.*

*This report also contains forward-looking statementsthat involve risks and uncertainties. Our actual results could differ materially from those anticipated in theforward-looking statements as a result of certain factors, including the risksdescribed below and elsewhere in this report.*

**Risks Related toDacogen, Orathecin and Nipent**

*If we do not receive regulatory approval for Dacogen,our future revenues may be limited and our business would be harmed.*

Our NDA submission for Dacogen was accepted for filingby the FDA on December 31, 2004.  Weexpect that the FDA will review and act on the NDA by September 2005.  Our European subsidiary, EuroGenPharmaceuticals Ltd., submitted an MAA for Dacogen to the EMEA, whichsubmission was accepted for review on October 25, 2004.  EMEA procedures provide that a decision onthe Dacogen MAA will usually occur within 12 months of acceptance of thesubmission.

The primary data analysis from our Phase III study ofDacogen indicates that the patients who were randomized to the Dacogen arm ofthe study had an increased time to progression to AML or death (p=0.042Wilcoxon test, p=0.198 Log-rank test), compared to patients randomized tosupportive care only.  Both analyses werespecified in the protocol. Although the results from the Log-rank test were notstatistically significant, we believe that these data are clinicallysignificant and formed the basis of our NDA submission.  In addition, adverse events were reportedmore frequently for patients randomized to the Dacogen arm, as compared tothose receiving supportive care, specifically, Leucopenia, febrile neutropenia,nausea, constipation, diarrhea, vomiting, pneumonia, arthralgia, headache and insomnia.   Severe adverse events were observed morefrequently in patients randomized to Dacogen. The mortality rate for patientsin the study was 12% for Dacogen and 9% for supportive care.  Consequently, there is no assurance that theFDA will agree with our assessment that Dacogen provides a clinicallysignificant 

45

----

benefit, that the FDA willnot take the position that the studies failed for statistical reasons, or thatwe will not be required to conduct additional large scale clinical trials. Evenif this data supports the submission of an NDA, the approval process may take asignificant amount of time and we may never receive approval.  If Dacogen is unsuccessful for any reason,including if the results of the Phase III study are deemed insufficient from eithera clinical or statistical basis by the FDA, our future revenues would belimited and our business would be harmed. Additionally, we might be forced to substantially scale down ouroperations or sell certain of our assets, and it is likely the price of ourstock would decline precipitously.

In addition, pursuant toour license agreement with MGI, we are expecting to receive payments from MGIin connection with the achievement of certain regulatory milestones.  If these regulatory milestones are not met,we will not receive these payments and our financial condition and businesswould be harmed.

*We are relying on European regulatory approval andsuccessful commercialization of Orathecin. If our MAA submission for Orathecindoes not support regulatory approval by the EMEA for any reason, our businesswill be harmed.*

On July 1, 2004 our European subsidiary, EuroGenPharmaceuticals Ltd., submitted an MAA for Orathecin to the EMEA.  This application is being reviewed under theEMEA Centralized Procedure, where marketing authorization is applied for in all25 European Union member states simultaneously. EMEA procedures provide that a decision on the Orathecin MAA willusually occur within 12 months of acceptance of the submission.

Even though the EMEA accepted our submission forfiling, the EMEA may not ultimately approve our MAA for Orathecin. The approvalprocess may take a significant amount of time and approval of our applicationwill be based on the agency’s review of Orathecin’s safety and efficacy. Importantfactors that the EMEA will take into account in its review and analysisinclude, among other things, time to disease progression and objective tumorresponse as well as toxicities seen in patients who were treated withOrathecin.

Given the large scale of the Orathecin clinicalprogram, the complexity of the clinical trials and the inherent uncertaintiesassociated with clinical trials of such magnitude and complexity, the data andstatistical analysis from these trials may not support regulatory approval orwe may be required to perform additional studies before obtaining regulatoryapproval. For example, the design of these trials allowed patients whoinitially were being treated with gemcitabine or other therapies to cross overto treatment with Orathecin. At the time the trials were designed, we believedthat the percentage of patients who would cross over for treatment withOrathecin would be in the range of 10% to 20% of the total enrolled patients.The number of patients in our trials who actually crossed over to treatmentwith Orathecin significantly exceeded the number anticipated and was nearly 50%in two of our Phase III studies. The extent of this cross over has negativelyaffected the statistical analysis of the study, making it difficult to determineif the product is efficacious with respect to survival.

In May 2003, we announced data from one of our PhaseIII studies of Orathecin in patients with advanced pancreatic cancer, most ofwhom had previously failed two or more chemotherapy treatments. The studyrandomized 409 patients to either Orathecin or “best medical therapy.”  The primary study end-point was overallsurvival with secondary end-points, including objective tumor response and timeto disease progression. We did not meet the primary end-point, although we didmeet two of the secondary end-points. The two secondary end-points wereindependent of a cross-over effect, whereas the primary end-point was not. Thereleased data, and the data from our other clinical trials, may not be sufficientto support regulatory approval for Orathecin, and additional trials may berequired before we can obtain regulatory approval.

46

----

If, for any reason, theEMEA ultimately determines not to approve our application for Orathecin, wewould be unable to proceed with our current plans for commercializing Orathecinin Europe.  Additionally, we might beforced to scale down our expansion effort with our European operations or sellcertain of our assets, and it is likely the price of our stock could decline.

*We are currently conducting clinical trials withOrathecin as a combination therapy. If these clinical trials do not supportregulatory approval, our business may be harmed.*

In early January 2005 weannounced the withdrawal of our NDA for Orathecin based on feedback from theFDA that the data package we submitted in support of the drug would not besufficient to gain regulatory approval. However, we are continuing to conduct clinical trials with Orathecin asa combination therapy while we review and determine whether or not we willcontinue to pursue regulatory approval for Orathecin.  Clinical trials are expensive to conduct,time-consuming and have uncertain outcomes. We will incur substantial expense while conducting these studies, and ifwe are unable to complete the studies, or if the results of the studies do notsupport regulatory approval of Orathecin as a combination therapy, we willincur significant operating losses and our business will be harmed.

*If wereceive regulatory approval of Orathecin for the treatment of patients withrefractory pancreatic cancer, Orathecin may not be commercially successful.*

If Orathecin receivesregulatory approval, whether in Europe, in the United States if we pursueregulatory approval with the FDA, or ultimately as a combination therapy,patients and physicians may not readily accept it, which would result in lowerthan projected sales and substantial harm to our business. Acceptance will be afunction of Orathecin being clinically useful and demonstrating superiortherapeutic effect with an acceptable side effect profile as compared tocurrently existing or future treatments. In addition, even if Orathecin doesachieve market acceptance, we may not be able to maintain that marketacceptance over time if new products are introduced that are more favorablyreceived than Orathecin or render Orathecin obsolete.

*If wereceive regulatory approval of Dacogen for the treatment of patients withmyelodysplastic syndromes, Dacogen may not be commercially successful.*

If Dacogen receivesregulatory approval in the United States or Europe, patients and physicians maynot readily accept it, which would result in lower than projected sales andsubstantial harm to our business through the receipt of lower royalty revenuefrom MGI.

*If weare unable to expand our clinical support for use of Nipent to treat additionaldiseases our revenues will not expand as planned.*

Part of our strategyinvolves expanding the market opportunities for our approved drugs, includingNipent, by seeking clinical support of their use for treatment of patients withadditional diseases.  We are currently marketingNipent for the treatment of patients with hairy cell leukemia, and revenuesfrom selling Nipent provided 80 - 90% of our revenues for the past threeyears.  We are conducting a series ofclinical trials with Nipent, including Phase IV trials for CLL, NHL, cutaneousand peripheral T-cell lymphomas and Phase II/III studies for GvHD. If ourNipent clinical trials are not successful, we will not be able to increase ourrevenue from Nipent.

***Risks Related toOur Financial Condition and Common Stock***

*We have a history of operating losses and we expect tocontinue to incur losses for the foreseeable future.*

Since inception, we havefunded our research and development activities primarily from privateplacements and public offerings of our securities, milestone payments andrevenues generated primarily from sales of Nipent, which is marketed in theUnited States for the treatment of patients with hairy cell 

47

----

leukemia.Our substantial research and development expenditures and limited revenues haveresulted in significant net losses. We have incurred cumulative losses of$333.5 million from inception through December 31, 2004, and our products havenot generated sufficient revenues to support our business during that time. Weexpect to continue to incur substantial operating losses at least through 2006 andmay never achieve profitability.

Whetherwe achieve profitability depends primarily on the following factors:

·       ourability to obtain regulatory approval for Dacogen, the successfulcommercialization of Dacogen by MGI, to successfully commercialize Orathecin inEurope, and to develop and obtain regulatory approval of Nipent for indicationsother than hairy cell leukemia;

·       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 successfully market Nipent in Europe as planned;

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

·       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 or inadequate commercial sales of Dacogen, Orathecin and otherproducts, once 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.

*Wewill require additional funding to expand our product pipeline, strengthen ourcommercialization  efforts and expand ourEuropean operations, and if we are unable to raise the necessary capital or todo so on acceptable terms, our planned expansion and continued survival couldbe harmed.*

We will continue to spendsubstantial resources on expanding our product pipeline, strengthening ourcommercialization efforts for our existing products, developing new avenues ofrevenue for Nipent, scaling-up of European operations to market, selling anddistributing our existing and future products, and conducting research anddevelopment, including clinical trials for other products and productcandidates.  We anticipate that ourcapital resources will be adequate to fund operations and capital expendituresthrough 2005. However, if we experience unanticipated cash requirements duringthis period, we could require additional funds much sooner. We may raise moneyby the sale of our equity securities or debt, or the exercise of outstandingwarrants and stock options by the holders of such warrants and options.However, given uncertain market conditions and the volatility of our stockprice, we may not be able to sell our securities in public offerings or privateplacements at prices and on terms that are favorable to us, if at all. Also,the dilutive effect of additional financings could adversely affect our pershare results. We may also choose to obtain funding through licensing and othercontractual agreements. For example, we recently licensed the worldwide rightsto the development, commercialization and distribution of Dacogen to MGI. Sucharrangements may require us to relinquish our rights to our technologies,products or marketing territories, or to grant licenses on terms that are notfavorable to us. If we fail to obtain adequate funding in a timely manner, orat all, we will be forced to scale back our product development activities, orbe forced to cease our operations.

48

----

*Ourcollaborative relationship with MGI may not produce the financial benefits thatwe are anticipating, which could cause our business 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 secureregulatory approval of Dacogen or due to our inability to expend the resourcesto commence sales of Dacogen as prescribed by the license agreement.  In addition, the license agreementcontemplates that MGI will pay us (i) a certain portion of revenues payable toMGI as a result of MGI sublicensing the rights to market, sell and/ordistribute Dacogen, to the extent such revenues are in excess of the milestonepayments, and (ii) a 20% royalty increasing to a maximum of 30% on annualworldwide net sales of Dacogen.  Wecannot guarantee that we will ever receive these payments, as MGI may choosenot to sublicense Dacogen at all, nor can we be assured that MGI will expendthe resources to sell Dacogen worldwide, or be successful in doing so.

*Ourequity investment in AVI exposes us to equity price risk and any impairmentcharge would affect our results of operations.*

We are exposed to equity price risk on our equityinvestment in AVI.  Currently we own2,684,211 shares of AVI.  Duringthe year ended December 31, 2004, we recorded a write-down of $7.9 millionrelated to other than temporary decline in the value of our equity investmentin AVI,resulting in a reduction of our cost basis in the AVI shares. Under ouraccounting policy, marketable equity securities are presumed to be impaired iftheir fair value is less than their cost basis for more than six months, absentcompelling evidence to the contrary. As of June 30, 2004, the AVI shares hadbeen trading below our original cost basis for more than six months. Sincethere was no compelling evidence to the contrary, we recorded the impairmentcharge of $7.9 million in our results of operations. The amount of thecharge was based on the difference between the market price of the shares as ofJune 30, 2004 and our adjusted cost basis. The public trading prices of the AVIshares have fluctuated significantly since we purchased them and could continueto do so. If the public trading prices of these shares continue to trade belowtheir new cost basis in future periods, we may incur additional impairmentcharges relating to this investment, which in turn will affect our results ofoperations.

In addition, in connectionwith the restructuring of our February Notes and the issuance of the JuneNotes, we issued three-year warrants to the June Note holders exercisable into 2,634,211of our AVI shares at an exercise price of $5.00 per share, and we pledged theAVI shares to secure our obligation under the June Notes. These warrants expireon December 31, 2006.

***Product Developmentand Regulatory Risks***

*Beforewe can seek regulatory approval of any of our product candidates, we mustcomplete clinical trials, which are expensive and have uncertain outcomes.*

Most of our products arein the developmental stage and, prior to their sale, will require regulatoryapproval and the commitment of substantial resources. Before obtaining regulatoryapprovals for the commercial sale of any of our product candidates, we mustdemonstrate through pre-clinical testing and clinical trials that our productcandidates are safe and effective for use in humans.

We have a portfolio ofcancer drugs in various stages of development, including Nipent (forindications other than hairy cell leukemia, Phase IV), Partaject busulfan(Phase I/II), inhaled Orathecin (Phase I/II), Orathecin capsules as acombination therapy (Phase II)  and wehave been conducting pre-clinical studies for VEGF and Cremophor-freepaclitaxel. In addition, we expect to commence new clinical trials from time totime in the course of our business as our product development work continues.Conducting clinical trials is a lengthy, time consuming and expensive processand the results are inherently uncertain. We have incurred and will continue toincur substantial expense for, and we have devoted and expect to continue todevote a significant amount of time to, pre-clinical testing and clinical trials.

49

----

However,regulatory authorities may not permit us to undertake any additional clinicaltrials for our product candidates. If we are unable to complete our clinicaltrials, our business will be severely harmed and the price of our stock willlikely 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.

*Ourclinical trials may be delayed or terminated, which would prevent us fromseeking necessary regulatory approvals.*

Completionof clinical trials may take several years or more. The length of a clinicaltrial varies substantially according to the type, complexity, novelty andintended use of the product candidate. For example, our three Phase IIIOrathecin clinical trials lasted from 1998 through the end of 2003. The lengthof time and 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.

*Wemay be required to suspend, repeat or terminate our clinical trials if they arenot conducted in compliance with regulatory requirements, if the trial resultsare negative, inconclusive or if they fail to demonstrate safety or efficacy.*

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 GCPs,regulations and guidelines enforced by the FDA for all of our products inclinical development.  The FDA enforcesGCPs through periodic inspections of study sponsors, principal investigators,and study sites.  If our CROs or we failto comply with applicable GCPs, the clinical data generated in our studies maybe deemed unreliable and the FDA may require us to perform additional studiesbefore approving our applications.  Inaddition, our clinical trials must be conducted with product candidatesproduced under current GMPs, and may require a large number of test subjects.Our failure to comply with these regulations may require us to repeat clinicalstudies, which would delay the regulatory approval process.

50

----

Even if we achieve positiveinterim results in clinical trials, these results do not necessarily predictfinal results, and acceptable results in early trials may not be repeated inlater trials. A number of companies in the pharmaceutical industry havesuffered significant setbacks in advanced clinical trials, even after achievingpromising results in earlier trials. Negative or inconclusive results oradverse medical events during a clinical trial could cause us to repeat orterminate a clinical trial. Our clinical trials may be suspended at any time ifwe or the FDA believe the patients participating in our studies are exposed tounacceptable health risks or if the FDA finds deficiencies in the conduct ofthese trials.

We may encounter otherproblems and failures in our studies that would cause us or the FDA to delay orsuspend the studies. The potential failures would delay development of ourproduct candidates, hinder our ability to conduct related pre-clinical testingand clinical trials and further delay the commencement of the regulatoryapproval process. Moreover, we may then be required to conduct other clinicaltrials for the product candidates, which would require substantial funding andtime. We may be unable to obtain funding to conduct such clinical trials. The failuresor perceived failures in our clinical trials would delay our productdevelopment and the regulatory approval process, damage our business prospects,make it difficult for us to establish collaboration and partnershiprelationships and negatively affect our reputation and competitive position inthe pharmaceutical industry.

*Ourfailure to obtain regulatory approvals to market our product candidates inforeign countries would adversely affect our anticipated revenues.*

Sales of our products inforeign jurisdictions will be subject to separate regulatory requirements andmarketing approvals. Approval in the United States, or in any one foreignjurisdiction, does not ensure approval in any other jurisdiction. The processof obtaining foreign approvals may result in significant delays, difficultiesand expenses for us, and may require additional clinical trials. So far, wehave applied through our subsidiary EuroGen for regulatory approval to marketOrathecin, mitomycin and paclitaxel in the United Kingdom and in othercountries within the European Union. Although many of the regulationsapplicable to our products in these foreign countries are similar to thosepromulgated by the FDA, many of these requirements also vary widely fromcountry to country, which could delay the introduction of our products in thosecountries. Failure to comply with these regulatory requirements or to obtainrequired approvals would impair our ability to commercialize our products inforeign markets.

Nipent is currently soldin Europe, and in early 2004 we acquired the rights to distribute and marketNipent there directly. We plan to commence distribution and marketing Nipent inEurope in the second half of 2005. However, our revenue from sales of Nipent in Europe is currently insignificant,and there is no guarantee that our distribution and marketing efforts willresult in significantly increased revenues. Our strategy is to obtain regulatory approvals to sell our products inEurope and elsewhere, and we intend to contract with third-partylicensees or distributors for sales outside the United States. Delays inobtaining regulatory approval from foreign jurisdictions will impair thecommercialization of our products and would delay anticipated revenues.

*Evenif we obtain regulatory approval, we will continue to be subject to extensivegovernment regulation that may cause us to delay the introduction of ourproducts or withdraw our products from the market.*

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 receipt of governmental approval, the facilitiesof our third-party manufacturers are still subject to unannouncedinspections by the FDA and must continue to comply with GMPs and otherregulations. These regulations govern all areas of production, record keeping,personnel and quality control. In the past, our third-party manufacturershave experienced delayed FDA approval, which adversely affected our ability tosupply Nipent in 2002. If we or our third-party manufacturers fail to 

51

----

complywith any of the manufacturing regulations, we may be subject to, among otherthings, product seizures, recalls, fines, injunctions, suspensions orrevocations of marketing licenses, operating restrictions and criminalprosecution.

Physicians may prescribedrugs for uses that are not described in a product’s labeling for uses thatdiffer from those tested by us and approved by the FDA. While such “off-label”uses are common and the FDA does not regulate physicians’ choice of treatments,the FDA does restrict a manufacturer’s communications on the subject ofoff-label use. Companies cannot actively promote FDA-approved drugs foroff-label uses, but they may disseminate to physicians articles published inpeer-reviewed journals. To the extent allowed by law, we intend to disseminatepeer-reviewed articles on our products to our physician customers. If, however,our promotional activities fail to comply with the FDA’s regulations orguidelines, we may be subject to warnings and/or enforcement action by the FDA.For example, in November 2002 we issued a press release announcing ourreceipt of FDA approval to market Mitozytrex. In March 2003, the FDAissued a “Talk Paper” regarding this press release, taking the position that wemade certain unsupported claims about the drug and did not disclose the seriousside effects such as suppression of bone marrow activity. We revised ourinternal procedures to help ensure our promotional activities and publicdisclosure will meet regulatory requirements. Nonetheless, any warning orenforcement actions by the FDA could harm our reputation in the market, resultin significant fines or have other results that would harm our business.

*Thecontinuing efforts of government and third-party payers to contain orreduce the costs of healthcare may adversely affect our revenues.*

Sales of our productsdepend in part upon the availability of reimbursement from third-partypayers, such as health administration authorities like Medicare/Medicaid,managed care providers and private health insurers. Third-party payersare increasingly challenging the price and examining the cost effectiveness ofmedical products and services, which may effectively limit physicians’ abilityto select products and procedures.

In addition, significantuncertainty exists as to the reimbursement status of newly approved healthcareproducts. For example, currently Medicare does not reimburse self-administeredproducts, which could cover some of our product candidates. Adequate third-partyreimbursement may not be available to enable us to maintain price levelssufficient to realize an appropriate return on our investment in a particularproduct. In addition, we believe government agencies will continue to proposeand pass legislation designed to reduce the cost of healthcare, which couldfurther limit reimbursement for pharmaceuticals, and we anticipate that therewill continue to be proposals in the United States to implement governmentcontrol over the pricing or profitability of prescription pharmaceuticals, asis currently the case in many foreign markets. If our current and proposedproducts are not considered cost-effective, reimbursement to the consumer maynot be available or be sufficient to allow us to sell products on a competitivebasis. The failure of the government and third-party payers to provideadequate coverage and reimbursement rates for our product candidates couldadversely affect the market acceptance of our products, our competitiveposition and our financial performance.

*If we are unable to comply with environmental laws andregulations, our business may be harmed.*

We are subject to federal,state and local laws and regulations governing the use, manufacture, storage,handling and disposal of hazardous materials and waste products. We currentlymaintain a supply of biohazardous materials at our facilities. We believe oursafety procedures for these materials comply with all applicable environmentallaws and regulations, and we carry insurance coverage we believe is adequatefor the size of our business. However, we cannot entirely eliminate the risk ofaccidental contamination or injury from these materials. If an accident orenvironmental discharge occurs, we could 

52

----

be heldliable for any resulting damages, which could exceed our insurance coverage andfinancial 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 materials that comply with governmental standards.Nevertheless, if an accident does occur, our research and product developmentwill be negatively affected.

***Additional RisksAssociated with Our Business***

*Ifthe third-party manufacturers upon whom we rely fail to produce ourproducts in the volumes that we require on a timely basis, or to comply withstringent regulations applicable to pharmaceutical drug manufacturers, we mayface delays in the delivery of, or be unable to meet demand for, our products.*

Becausewe have no manufacturing facilities, we rely on third parties for manufacturingactivities related to all of our products. As we develop new products andincrease sales of our existing products, we must establish and maintainrelationships with manufacturers to produce and package sufficient supplies ofour finished pharmaceutical products, including Nipent. 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 commercial needs if market demand for our products increasessuddenly, which would require us to seek new manufacturing arrangements and mayresult 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. For example,a failed production batch of Nipent in the second quarter of 2003 affected ourability to supply Nipent and adversely affected our sales.

Currently we store themajority of the unpurified, bulk form of Nipent at the manufacturer’s location.Improper storage, fire, natural disaster, theft or other conditions at thislocation may lead to the loss or destruction of the bulk concentrate. Even if themanufacturer’s and our insurance coverage is adequate, such event wouldinevitably cause delays in distribution and sales of our products and harm ouroperating results.

*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 to 

53

----

contractwith any of these companies on acceptable terms, if at all. For example, thecompany that had been purifying Nipent filed for bankruptcy in mid 2001.Shortly thereafter we contracted with a new manufacturer for the purificationof Nipent, and that manufacturer was qualified by the FDA by May 2002. Weexperienced unusually low inventory levels during the first quarter of 2002,while we were waiting for the new company to be qualified. The company that hadbeen purifying Nipent filed for reorganization under Chapter 11 and has ceasedoperations in late 2004. We are in the process of contracting with anothermanufacturer for the purification of Nipent. If the new manufacturer is not qualified by the FDA or if the newmanufacturer should go out of business, we may not have adequate inventorylevels to sustain our business while we identify and contract with anothermanufacturer for the purification of Nipent.

*Ifour suppliers cannot provide the components we require, our product sales andrevenue could be harmed.*

We rely on third-partysuppliers to provide us with numerous components used in our products underdevelopment, including Orathecin and Dacogen. Relying on third-partysuppliers makes us vulnerable to component failures and interruptions insupply, either of which could impair our ability to conduct clinical trials orto ship our products to our customers on a timely basis. Using third-partysuppliers makes it difficult and sometimes impossible for us to maintainquality control, manage inventory and production schedules and controlproduction costs. Vendor lead times to supply us with ordered components varysignificantly and can exceed six months or more. Both now and as we expand ourneed for manufacturing capacity, we cannot be sure that our suppliers willfurnish us with required components when we need them. These factors could makeit difficult for us to effectively and efficiently manufacture our products,and could adversely impact our clinical trials, product development and salesof 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. We rely on one manufacturer for Nipent, a sole source supplierfor the processing of pentostatin, which is used in the manufacturing ofNipent, and a sole source supplier for the ingredient used in the purificationof pentostatin. We also rely on sole source suppliers for mitomycin productsand Surface Safe.

Vendors may decide tolimit or eliminate sales of certain products to the medical industry due toproduct liability or other concerns. For example, one component used in thepurification of pentostatin is no longer commercially available. In the eventone of our sole source suppliers decides not to manufacture the component, goesout of business, or decides to cut off our supply, we may be unable to locatereplacement supply sources, or the sources that we may locate may not provideus with similar reliability or pricing and our business could suffer. If wecannot obtain a necessary component, we may need to find, test and obtainregulatory approval for a replacement component, produce the component orredesign the related product, which would cause significant delay and couldincrease our manufacturing costs. Any of these events could adversely impactour sales and results of operations.

*Wehave limited sales and marketing capabilities and may not be able tosuccessfully commercialize our products.*

We currently have limitedsales and marketing resources. Although we have approximately 37 sales,marketing and sales support personnel focusing on the sale of our products tohospitals and hospital buying groups, we must expand our sales and marketingorganization to support commercialization of our new products. Building up oursales capabilities will require significant expenditures. We may not succeed inexpanding and enhancing our sales and marketing capabilities or have sufficientresources to do so. If we do develop such capabilities, we will compete with othercompanies that have experienced and well-funded sales and marketing operations.We may not be able to upgrade our in-house sales expertise which may limit ourability to gain market acceptance for our products worldwide and generaterevenues. If we fail to establish successful sales and marketing capabilities,we will not be able to market or sell our products effectively and ourbusiness, financial condition and results of operations will be materially andadversely affected.

54

----

We intend to enter intostrategic partnerships for the commercialization of our products outside of theUnited States. However, we may not be able to negotiate acceptable arrangementswith partners, if at all. Moreover, such arrangements may involve sharing ofprofits from sales, requirements to relinquish certain of our rights to ourproducts or marketing territories and impositions of other limitations on ouroperations.

*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. For example, we licensedthe exclusive worldwide royalty-bearing rights to Orathecin from TheStehlin Foundation for Research. Due to the expense of the drug approvalprocess we must have relationships with established pharmaceutical companies tooffset some of our development costs in exchange for a combination ofdevelopment, 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 be requiredto seek other partners, or expend substantial resources to pursue theseactivities independently; and

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

In addition, ourcollaborators may undergo business combinations, which could have the effect ofmaking a collaboration with us less attractive to them for a number of reasons.For example, if an existing collaborator purchases a company that is one of ourcompetitors, that company may be less willing to continue its collaborationwith us. A company that has a strategy of purchasing companies with 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 or terminationof the research, development or commercialization of product candidates orresult 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 enter into collaborativerelationships with third parties to co-develop and market products. Forexample, we entered into an agreement with Peregrine Pharmaceuticals in February 2001,pursuant to which we licensed a drug-targeting technology known as VascularTargeting 

55

----

Agent, which is aproprietary platform designed to specifically target a tumor’s blood supply andsubsequently destroy the tumor with various attached therapeutic agents. Thelicensed technology is specifically related to VEGF. Under the agreement, wemade an up-front equity investment in Peregrine of $600,000 and will beobligated to make subsequent milestone payments that could ultimately total$8.25 million. In addition, we will pay royalties to Peregrine based onthe net revenues of any drugs we commercialize using the VEGF technology.

These relationshipsrequire substantial financial commitments from us, and at the same time theproduct developments are subject to the same regulatory requirements, risks anduncertainties associated with the development of our other product candidates.The compounds that are the subject of these collaborative agreements may proveto be ineffective, may fail to receive regulatory approvals, may beunprotectable by patents or other intellectual property rights, or may not beotherwise commercially viable. If these collaborative relationships are notsuccessful, our product developments will be adversely affected, and ourinvestments and efforts devoted to the product 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 40 U.S.patents covering various aspects of our proprietary drugs and technologies,including 37 patents for various aspects of Orathecin and related products,five patents under our Nipent product portfolio, although none covers the useof Nipent for the treatment of patients with hairy cell leukemia, six patentsfor our paclitaxel related products, one patent for Dacogen used in combinationwith an anti-neoplastic agent for the treatment of cancer, and twopatents for our Surface Safe product. These issued United States patents willbegin to expire in October 2012. We have been granted patents and havereceived patent licenses relating to our proprietary formulation technology,non-oncology and Partaject technologies, among which at least fivepatents are issued or licensed to us. In addition, we are prosecuting a numberof patent applications for drug candidates that we are not actively developingat this time.

We also have patents, licenses to patents and pendingpatent applications in Europe, Australia, Japan, Canada, Mexico and NewZealand, among other countries. In addition, we have patent applicationspending in China, Hungary and Israel. 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 to maintain effective protection, we focus our patent andlicensing activities within the European Union, Canada and Japan. Indetermining whether or not to seek patent protection or to license any patentin a foreign country, we weigh the relevant costs and benefits, and consider,among other things, the market potential and profitability, the scope of patentprotection afforded by the law of the jurisdiction and its enforceability, andthe nature of terms with any potential licensees. Failure to obtain adequatepatent protection for our proprietary drugs and technology would impair ourability to be commercially competitive in these markets.

56

----

The pharmaceutical industry is characterized by alarge number of patent filings involving complex legal and factual questions,and therefore we cannot predict with certainty whether our patents will beenforced effectively. Competitors may have filed applications for, or beenissued patents on, products or processes that compete with or are similar toours. We may not be aware of all of the patents potentially adverse to ourinterests which may have been issued to others. In addition, third parties maychallenge, invalidate or circumvent any of our patents. Thus, any patents thatwe own or license from third parties may not provide adequate protectionagainst competitors, if at all. Our pending patent applications and those wemay file in the future, or those we may license from third parties, may notresult in patents being issued with adequate claim scope, if at all.

In addition to pursuing patent protection inappropriate instances, we also rely on trade secret protection or regulatorymarketing exclusivity for unpatented proprietary technology. However, tradesecrets are difficult to protect. Our trade secrets or those of ourcollaborators may become known or may be independently discovered by others.

In the pharmaceutical industry there has been, and webelieve that there will continue to be, significant litigation regarding patentand other intellectual property rights. Claims may be brought against us in thefuture based on patents held by others. These persons could bring legal actionsagainst us claiming damages and seeking to enjoin clinical testing,manufacturing and marketing of the affected product. If we become involved inlitigation, it could consume a substantial portion of our resources, regardlessof the outcome of the litigation. If a lawsuit against us is successful, inaddition to any potential liability for damages, we could be required to obtaina license to continue to manufacture or market the affected product. We cannotassure you that we would prevail in a lawsuit filed against us or that we couldobtain any licenses required under any patents on acceptable terms, if at all.

Our proprietary productsare dependent upon compliance with numerous licenses and agreements. These licensesand agreements require us to make royalty and other payments, reasonablyexploit the underlying technology of the applicable patents, and comply withregulatory filings. If we fail to comply with these licenses and agreements, wecould lose the underlying rights to one or more of these potential products,which would adversely affect our product development and harm our business.

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

The pharmaceutical industry in general and theoncology sector in particular is highly competitive and subject to significantand rapid technological change. Our competitors and probable competitorsinclude companies such as Aventis SG, Berlex Laboratories, Bristol-MyersSquibb Company, 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. Some of our competitors have received regulatory approval of, orare developing or testing product candidates that compete directly with, ourproduct candidates. For example, while we received orphan drug status forOrathecin and there is currently no competitor in the oral delivery market forthe treatment of pancreatic cancer, there are approved drugs for the treatment ofpancreatic cancer, including gemcitabine by Eli Lilly. In addition, BerlexLaboratories’ fludarabine competes with Nipent in the leukemia market, andDacogen faces potential competition from Pharmion’s Vidaza, which was approvedby the FDA in the first half of 2004.

Many of these competitors have significantly greaterexperience than we do in developing products, undertaking pre-clinical testingand clinical trials, obtaining FDA and other regulatory approvals, andmanufacturing and marketing products. Accordingly, our competitors may succeedin obtaining patent protection, receiving FDA approval or commercializingproducts before we do. If we commence sales of 

57

----

our product candidates, wewill be competing against companies with greater marketing expertise andmanufacturing capabilities, areas in which we have limited 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.

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.

*The pharmaceutical industry in general and theoncology sector in particular is subject to significant and rapid technologicalchange. Developments by competitors may render our product candidates ortechnologies obsolete or non-competitive.*

Our competitors may succeed in developing technologiesor products that are more effective than ours. Additionally, our products thatare under patent protection face intense competition from competitors’proprietary products. This competition may increase as new products enter themarket.

A number of ourcompetitors have substantially more capital, research and development,regulatory, manufacturing, marketing, human and other resources and experiencethan 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 products based upon compounds thatmay be covered by patents held by third parties that are expected to expire oralready expired. These compounds may also be the subject of method,formulation, and manufacturing process patents held by third parties. If thesepatents do not expire as anticipated or are expanded in scope, we will not beable to develop our products as planned.*

We developed, or are in the process of developing, andare planning to market several generic and proprietary formulation productsbased on existing compounds. Specifically, with respect to our genericproducts, we received approval of Abbreviated Antibiotic Drug Applications  for our generic mitomycin for solid tumorsand daunorubicin for a variety of acute leukemias, and have filed anAbbreviated New Drug Application  for ourgeneric paclitaxel.

58

----

Our proprietary formulation technology is a platformtechnology that employs the use of an inert chemical excipient, cyclodextrin,combined with a drug. Most anti-cancer drugs are cytotoxic, and most mustbe administered intravenously. If a vein is missed on injection, the drug canleak to 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 providing the patient protection fromtissue ulceration. This technology may increase the relative solubility ofhard-to-dissolve anti-cancer drugs, hence increasing its stability orshelf life. However, each of these benefits must be supported by appropriatedata and approved by the FDA before we can make any claim in this regard. Ourfirst product utilizing our proprietary formulation technology, a formulationof generic mitomycin, was approved by the FDA in November 2002 asMitozytrex (mitomycin for injection) for use in the therapy of disseminatedadenocarcinoma of the stomach or pancreas in proven combinations with otherapproved chemotherapeutic agents and as palliative treatment when othermodalities have failed. We cannot promote Mitozytrex as providing any injectionsite ulceration protection, nor can we promote any increased stability,solubility or shelf life extension, as compared to generic mitomycin. We wouldbe required to develop and submit additional data to the FDA and receive FDAapproval before we could make these claims.

Through December 31, 2004, we have spent approximately$6.4 million on developing and marketing our generic and proprietaryformulation products. We have completed our pre-commercial investment indeveloping Mitozytrex, and as of now we have not committed to an internalbudget for additional proprietary formulation development programs. Inaddition, we have no further generic drug development commitments, as we arefocusing 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 million per occurrence and $10 million in the aggregate. We donot know whether this coverage will be adequate to protect us in the event of aclaim. 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 

59

----

replacementin time to allow a smooth transition, our business operation may be adverselyaffected. To successfully expand our operations, we will need to attract andretain additional highly skilled individuals, particularly in the areas ofsales, marketing, clinical administration, manufacturing and finance. Wecompete with other companies for the services of existing and potential employees,however to the extent these employees favor larger, more established employers,we may be at a disadvantage.

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

Our operations are vulnerableto interruption by fire, power loss, floods, telecommunications failure andother events beyond our control. In addition, our operations are susceptible todisruption as a result of natural disasters such as earthquakes. So far we havenever experienced any significant disruption of our operations as a result ofearthquakes or other natural disasters. Although we have a contingency recoveryplan, any significant business interruption could cause delays in our drugdevelopment and sales and harm our business.

*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 203of the Delaware General Corporation Law prevents a stockholder owning15 percent or more of a corporation’s outstanding voting stock fromengaging in business combinations with a Delaware corporation for three yearsfollowing the date the stockholder acquired 15 percent or more of acorporation’s outstanding voting stock. This restriction is subject toexceptions, including the approval of the board of directors and of the holdersof at least two-thirds of the outstanding shares of voting stock not owned bythe interested stockholder.

We believe that the benefits of increased protectionof our potential ability to negotiate with the proponents of unfriendly orunsolicited proposals to acquire or restructure us outweigh the disadvantagesof discouraging those proposals because, among other things, negotiation ofthose proposals could result in an improvement of their terms. Nevertheless,these provisions are expected to discourage different types of coercivetakeover practices and inadequate takeover bids and to encourage personsseeking to acquire control of our company to first negotiate with us, and mayhave the effect of preventing or discouraging third parties or stockholdersfrom attempting to replace our management.

60

----

**ITEM7A**. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK.

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 is to manage our marketablesecurities portfolio to preserve principal and liquidity while maximizing thereturn on the investment portfolio. Our marketable securities portfolio isprimarily invested in corporate debt securities with an average maturity ofunder one year and a minimum investment grade rating of A or A-1 orbetter to minimize credit risk. Although changes in interest rates may affectthe fair value of the marketable securities portfolio and cause unrealizedgains or losses, such gains or losses would not be realized unless theinvestments were to be sold prior to maturity.

As part of our June 2003 convertible debttransaction, we issued to the note holders warrants to purchase 2,634,211shares of common stock of AVI at $5.00 per share. These warrants are considereda derivative and were valued on the balance sheet at $10.1 million usingthe Black-Scholes method on June 24, 2003. On December 31,2004, the value of the derivative had declined to $1.6 million. As thefair value of the common stock of AVI has fluctuated significantly in the pasttwo years, the valuation of the derivative may have a significant impact on ourresults of operations.

We operate primarily inthe United States and all product sales are denominated in U.S. dollars.Accordingly, we do not have any exposure to foreign currency rate fluctuations.

**ITEM8**. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

All information requiredby this item is included on pages F-1 to F-26 in Item 15of Part IV of this Report and is incorporated into this item by reference.

**ITEM9**. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.

None.

**ITEM9A**. CONTROLS AND PROCEDURES.

**Evaluation ofDisclosure Controls and Procedures.**

Based on their evaluationas of December 31, 2004, our chief executive officer and chief financialofficer have concluded that our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) were effective to ensure theinformation required to be disclosed by us in reports that we file or submitunder the securities exchange act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms.

**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). Underthe supervision and with the participation of our management, including ourchief executive officer and chief financial officer, we conducted an evaluationof the effectiveness of our internal control over financial reporting as of December 31,2004. In making this assessment, our management used the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission inInternal Control-Integrated Framework (“the COSO Framework”). Our managementhas concluded that, as of December 31, 2004, our internal control overfinancial reporting was effective based on these criteria.

61

----

Management’s assessment ofthe effectiveness of our internal control over financial reporting as of December 31,2004 has been audited by Ernst & Young LLP, an independent registeredpublic accounting firm, as stated in their report which is included elsewhereherein.

**Changes in InternalControl over Financial Reporting**

There were no changes in our internal control overfinancial reporting during the quarter ended December 31, 2004 that havematerially affected, or are reasonably likely to materially affect our internalcontrol over financial reporting.

62

----

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors andStockholdersSuperGen, Inc.

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl, that SuperGen, Inc. maintained effective internal control overfinancial reporting as of December 31, 2004, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). SuperGen, Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.

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

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that SuperGen, Inc. maintained effective internal control overfinancial reporting as of December 31, 2004, is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, SuperGen, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2004, based on the COSO criteria.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofSuperGen, Inc. as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the three years in the period ended December 31, 2004 of SuperGen, Inc.and our report dated March 15, 2005 expressed an unqualified opinionthereon.
|                       | /s/ Ernst & Young LLP |
|-----------------------|---------------------------|
| Palo Alto, California |                      |
| March 15, 2005   |                      |

 

63

----

**PART III**

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

Information regarding our Board of Directors isincorporated by reference to the section entitled “Election of Directors”appearing in our definitive Proxy Statement for the Annual Meeting ofStockholders to be filed with the Commission by April 15, 2004 (the “ProxyStatement”).

The names of our executiveofficers and their ages, titles and biographies as of February 26, 2005are set forth below.

**Executive Officers**
| **Name**                   | ** ** | ** ** | ** ** | ** **                                       | **Age** | ** ** | ** ** | **Position** | ** ** | ** ** |
|----------------------------|------------|------------|------------|--------------------------------------------------|---------|------------|------------|--------------|------------|------------|
| James S. J. Manuso,  Ph.D. |       | 56         |       | President, Chief  Executive Officer and Director |
| Edward L. Jacobs           |       | 58         |       | Chief Operating Officer                          |
| Audrey Jakubowski, Ph.D.   |       | 62         |       | Senior Vice President,  Regulatory Affairs       |
| Michael Molkentin          |       | 50         |       | Chief Financial Officer                          |

 

*James S.J. Manuso, Ph.D.,* hasserved as our president and chief executive officer since January 1, 2004,as our chief executive officer-elect from September 2003 to December 2003and as a director since February 2001. Dr. Manuso is co-founder andimmediate past president and chief executive officer of GalenicaPharmaceuticals, Inc. Immediately prior to this appointment, he waspresident of Manuso, Alexander & Associates, Inc., managementconsultants and financial advisors to pharmaceutical and biotechnologycompanies since 1992. Dr. Manuso co-founded and was general partner ofPrimeTech Partners, a venture management partnership that developedbiotechnology companies, from 1998 to 2002. He serves on the boards of twoprivately-held companies, including Quark Biotech, Inc. and KineMed, Inc.Previously, he served on the boards of Galenica Pharmaceuticals, Inc.,Symbiontics, Inc., Supratek Pharma, Inc., and Inflazyme Pharmaceuticals, Inc.Dr. Manuso earned an A.B. with Honors in Economics and Chemistry from NewYork University, a Ph.D. in Experimental Psychophysiology from the GraduateFaculty of The New School University, where he was a New School Scholar, aCertificate in Health Systems Management from Harvard Business School, and anExecutive M.B.A. from Columbia Business School where he was an EquitableCompanies Scholar. Dr. Manuso is the author of over 30 chapters, articlesand books on topics including health care systems general management andbiotech company development. He has taught at Columbia, Georgetown, WasedaUniversity (Japan) and elsewhere and he has delivered invited addresses to theAmerican Medical Association, the Biotechnology Industry Association, theSecurities Industry Association and many other professional associations.

*Edward L. Jacobs* rejoined us in October 2001as chief business officer and chief financial officer, and in October 2003became our chief operating officer. From February 2001 through September 2001,he served as president and chief executive officer of ETEX Corporation. Heoriginally came to us as executive vice president, commercial operations in March 1999and served in that position until January 2001. Prior to joining us in1999 Mr. Jacobs served as senior vice president, commercial operations atSequus Pharmaceuticals, Inc. from November 1997 to March 1999.Between January 1995 and November 1997, Mr. Jacobs served aspresident and chief executive officer of Trilex Pharmaceuticals Inc., nowTitan Pharmaceuticals. Prior to his association with Trilex, Mr. Jacobsserved in a variety of senior management positions with pharmaceuticalcompanies, including chief executive at Transplant Therapeutics Inc., vicepresident and general manager of Syncor International Inc., vice presidentat NEORX Corporation, business director of Pharmacia Corp., The Upjohn Company(Adria Labs, Inc.) and Johnson & Johnson (McNeil). Mr. Jacobsreceived a B.A. in Political Science/Journalism from California StateUniversity at Northridge.

64

----

*Audrey Jakubowski, Ph.D.,* joinedus as vice president, regulatory affairs in August 1998 and served in thatcapacity until October 2003 when she became senior vice president,regulatory affairs. In January 2004, she was also given responsibility forquality assurance. Prior to joining us, Dr. Jakubowski was vice president,regulatory affairs and quality at Systemix, Inc. from June 1996 to July 1998.From October 1989 through June 1996, Dr. Jakubowski wasexecutive director and then vice president of worldwide regulatory affairs forThe DuPont Merck Pharmaceutical Company. From November 1979 through October 1989,Dr. Jakubowski was first director of regulatory affairs, dermatologyproducts at Westwood Pharmaceuticals, followed by director of internationalregulatory affairs, R&D products for Bristol Myers’ research anddevelopment 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. Jakubowskireceived her Ph.D. in physical chemistry at SUNY Buffalo and her B.A. at SetonHall College.

*Michael Molkentin* joined us aschief financial officer and corporate secretary in October 2003. Prior tojoining us, Mr. Molkentin served as interim chief financial officer atAradigm Corporation 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.

*Karl L.Mettinger, M.D., Ph.D.* served as chief medical officer duringall of 2004. Dr. Mettinger left the Company in January 2005.

**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 Guidelines**

Information regardingCorporate Governance Guidelines is incorporated by reference to the ProxyStatement.

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

Information regarding Section 16(a) beneficialownership reporting compliance is set forth under “Voting Securities ofPrincipal Stockholders and Management” in the Proxy Statement, whichinformation is incorporated herein by reference.

**ITEM 11**.EXECUTIVE COMPENSATION.

Information regardingexecutive compensation is incorporated by reference to the information setforth under the caption “Executive Compensation” in the Proxy Statement.

65

----

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

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 may be found in Part II, Item 5 ofthis report.

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

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.

**ITEM 14**.PRINCIPAL ACCOUNTING 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.

 

66

----

**PART IV**

**ITEM15**. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTSON FORM 8-K.

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

1.     *All Financial Statements:*

Thefollowing financial statements and the Reports of Ernst & Young LLP,Independent Registered Public Accounting Firm, are included in Part IV ofthis 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 are omitted because they are notapplicable or the required information is shown in the consolidated financialstatements 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                                                                                                                                            |
| (**)(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     |       | Employment, Confidential Information, Invention  Assignment and Arbitration Agreement dated January 1, 2004 between  Registrant and Joseph Rubinfeld. |
| (**)(a)10.14     |       | Executive Employment and Confidential Information  and Invention Assignment Agreement dated January 1, 2004 between  Registrant and James Manuso.     |

67

----

 
| (f)10.15     |   | Office Building Lease dated June 23, 2000  between the Registrant and Koll Dublin Corporate Center, L.P.                                                                                                                                         |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (d)10.16     |   | Purchase and Sale Agreement dated as of  September 30, 1996 between the Registrant and Warner-Lambert  Company, a Delaware corporation.                                                                                                          |
| (*)(e)10.17  |   | Asset Purchase Agreement dated January 15, 1997  between the Registrant and Immunex Corporation, a Washington corporation.                                                                                                                       |
| (*)(x)10.18  |   | Drug Substance Validation and Supply Agreement dated  July 2, 2003.                                                                                                                                                                              |
| (*)(g)10.19  |   | License Agreement between Inflazyme Pharmaceuticals  Ltd. and the Registrant dated April 11, 1997.                                                                                                                                               |
| (*)(g)10.20  |   | Nonexclusive Supply Agreement between the Registrant  and Yunnan Hande Technological Development Co. Ltd. dated May 7, 1997.                                                                                                                     |
| (h)10.21     |   | 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)10.22     |   | Amendment No. 1 to the Tako Purchase Agreement  dated March 17, 1999.                                                                                                                                                                       |
| (r)10.23     |   | Stock Purchase Agreement between the Registrant and  Tako dated January 29, 1999.                                                                                                                                                                |
| (*)(j)10.24  |   | License Agreement between Stehlin Foundation for  Cancer Research and the Registrant dated September 3, 1997.                                                                                                                                    |
| (*)(ee)10.25 |   | Amendment No. 1 to License Agreement dated  November 1, 1999 between the Registrant and the Stehlin Foundation for  Cancer Research.                                                                                                        |
| (*)(k)10.26  |   | Supply Agreement dated October 20, 1997 between  the Registrant and Warner-Lambert Company.                                                                                                                                                      |
| (o)10.27     |   | Agreement and Plan of Reorganization by and among  the Registrant, Royale Acquisition Corp., and Sparta  Pharmaceuticals, Inc. dated January 18, 1999.                                                                                      |
| (w)10.28     |   | 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)10.29     |   | 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 A). |
| (r)10.30     |   | 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)10.31  |   | Common Stock and Option Purchase Agreement , dated  December 21, 1999 between the Registrant and Abbott Laboratories.                                                                                                                            |
| (z)10.32     |   | Form Registration Rights Agreement.                                                                                                                                                                                                              |
| (*)(z)10.33  |   | Worldwide Sales, Distribution, and Development  Agreement, dated December 21, 1999 between the Registrant and Abbott  Laboratories.                                                                                                              |
| (*)(z)10.34  |   | U.S. Distribution Agreement, Dated December 21,  1999 between the Registrant and Abbott Laboratories.                                                                                                                                            |
| (aa)10.35    |   | Registration Rights Agreement dated  December 15, 1999 between the Registrant and AVI BioPharma, Inc.                                                                                                                                       |
| (aa)10.36    |   | Subscription Agreement dated  December 1, 1999 between the Registrant and AVI  BioPharma, Inc.                                                                                                                                         |
| (ee)10.37    |   | Common Stock and Warrant Purchase Agreement dated  April 4, 2000 between the Registrant and AVI BioPharma, Inc.                                                                                                                             |
| (ee)10.38    |   | United States of America Sales, Distribution, and  Development Agreement dated April 4, 2000 between the Registrant and AVI  BioPharma, Inc.                                                                                                |

68

----

 
| (dd)10.39    |   | Registration Rights Agreement dated April 4,  2000 between the registrant and AVI BioPharma, Inc.                                                                     |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (bb)10.40    |   | License Agreement  (Camptothecin) dated November 15, 1999 between the Registrant and  Research Development Foundation.                                                     |
| (bb)10.41    |   | License Agreement (Paclitaxel)  dated November 15, 1999 between the Registrant and  Research Development Foundation                                                   |
| (ee)10.42    |   | Asset Purchase Agreement dated February 18,  2000 between the Registrant and AMUR Pharmaceuticals, Inc.                                                               |
| (ee)10.43    |   | Patent and Intellectual Property Assignment  Agreement dated September 27, 2000 between the Registrant and AMUR  Pharmaceuticals, Inc.                                |
| (*)(gg)10.44 |   | Supply and Distribution Agreement dated  September 21, 2001 between the Registrant and EuroGen Pharmaceuticals  Ltd.                                                       |
| (hh)10.45    |   | Termination and Release Agreement dated  March 4, 2002 between the Registrant and Abbott Laboratories.                                                                     |
| (ii)10.46    |   | Securities Purchase Agreement dated  September 23, 2002 by and between the Registrant and the purchasers  named therein.                                                   |
| (ii)10.47    |   | Registration Rights Agreement dated  September 23, 2002 by and between the Registrant and the purchasers  named therein.                                                   |
| (ii)10.48    |   | Form of Warrant dated September 24, 2002  issued to the purchasers under the Securities Purchase Agreement dated  September 23, 2002.                            |
| (ii)10.49    |   | Warrant dated September 24, 2002 issued Paul  Revere LLC.                                                                                                                  |
| (jj)10.50    |   | Registration Rights Agreement dated March 22,  2001 by and between the Registrant and The Kriegsman Group.                                                                 |
| (jj)10.51    |   | Warrant A Agreement dated March 22, 2001 by and  between the Registrant and The Kriegsman Group.                                                                           |
| (kk)10.52    |   | Securities Purchase Agreement dated  February 26, 2003 by and among the Registrant and the purchasers named  therein.                                                      |
| (kk)10.53    |   | Form of Senior Exchangeable/Convertible Note  dated February 26, 2003 issued to the purchasers under the Securities  Purchase Agreement dated February 26, 2003. |
| (kk)10.54    |   | Registration Rights Agreement dated  February 26, 2003 by and among the Registrant and the purchasers named  therein.                                                      |
| (kk)10.55    |   | Form of Warrant dated February 26, 2003  issued to the purchasers under the Securities Purchase Agreement dated  February 26, 2003.                              |
| (kk)10.56    |   | Pledge Agreement dated February 26, 2003  executed by the Registrant in favor of the purchasers under the Securities  Purchase Agreement dated February 26, 2003.     |
| (kk)10.57    |   | Securities Account Control Agreement dated  February 26, 2003 by and among the Registrant, the purchasers named  therein, and Mellon Investor Services LLC.                |
| (*)(l)10.58  |   | Pentostatin Supply Agreement dated December 13,  2002 between the Registrant and Hauser Technical Services, Inc.                                                      |
| (*)(m)10.59  |   | License Agreement dated February 13, 2001  between the Registrant and Peregrine Pharmaceuticals, Inc.                                                                 |
| (y)10.60     |   | Securities Purchase Agreement dated June 24,  2003 by and among the Registrant and the purchasers named therein.                                                           |
| (y)10.61     |   | Form of Senior Convertible Note dated  June 24, 2003 issued to the purchasers under the Securities Purchase  Agreement dated June 24, 2003.                      |
| (y)10.62     |   | Registration Rights Agreement dated June 24,  2003 by and among the Registrant and the purchasers named therein.                                                           |

69

----

 
| (y)10.63    |   | Form of Warrant dated June 24, 2003 issued  to the purchasers under the Securities Purchase Agreement dated June 24,  2003.                                                        |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (y)10.64    |   | 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)10.65    |   | 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)10.66    |   | Collateral Account Agreement dated June 24,  2003.                                                                                                                                           |
| (y)10.67    |   | Conversion and Amendment Agreement dated  June 24, 2003.                                                                                                                                     |
| (y)10.68    |   | Amended and Restated Convertible Notes dated  June 24, 2003.                                                                                                                                 |
| (c)10.69    |   | Securities Purchase Agreement dated as of  March 5, 2004 by and among the Registrant and the purchasers named  therein.                                                                      |
| (c)10.70    |   | Registration Rights Agreement dated as of  March 5, 2004 by and among the Registrant and the purchasers named  therein.                                                                      |
| (c)10.71    |   | 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)10.72 |   | Purchase and Sale Agreement dated February 17,  2004 between the Registrant and Pfizer Inc.                                                                                                  |
| (*)(q)10.73 |   | Amended and Restated License Agreement effective  September 21, 2004 between the Registrant and MGI PHARMA, Inc.                                                                        |
| (q)10.74    |   | Common Stock Purchase Agreement dated August 31,  2004 between the Registrant and MGI PHARMA, Inc.                                                                                      |
| (q)10.75    |   | Investor Rights Agreement dated August 31, 2004  between the Registrant and MGI PHARMA, Inc.                                                                                            |
| (q)10.76    |   | Warrant dated September 22, 2004 issued to The  Kriegsman Group.                                                                                                                             |
| 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.       |

----

 
| (*)  |   | Confidential treatment has been previously granted  for certain portions of these exhibits.                                                                                                                                   |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (**) |   | Indicates a management  contract or compensatory plan or arrangement.                                                                                                                                                         |
| (a)  |   | Incorporated by  reference from the Registrant’s Report on Form 10-K filed with the  Securities and Exchange Commission on March 4, 2004.                                                                      |
| (b)  |   | Incorporated by  reference from Amendment No. 1 to the Registrant’s Registration  Statement on Form SB-2 (Reg. No. 333-476-LA)  filed with the Securities and Exchange Commission February 26, 1996. |
| (c)  |   | Incorporated by  reference from the Registrant’s Report on Form 8-K filed with the  Securities and Exchange Commission on March 10, 2004.                                                                      |

70

----

 
| (d) |   | Incorporated by  reference from the Registrant’s Report on Form 8-K filed with the  Securities and Exchange Commission on October 15, 1996.                                                                                      |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (e) |   | Incorporated by reference from the Registrant’s  Report on Form 10-K filed with the Securities and Exchange  Commission on March 31, 1997.                                                                                       |
| (f) |   | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on August 11, 2000.                                                                                      |
| (g) |   | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on May 15, 1997.                                                                                         |
| (h) |   | Incorporated by  reference from the Registrant’s Report on Form 8-K filed with the  Securities and Exchange Commission on July 2, 1997.                                                                                          |
| (i) |   | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on August 13, 1997.                                                                                      |
| (j) |   | Incorporated by reference  from Amendment No. 2 on Form S-3 to the Registrant’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 by  reference from the Registrant’s Report on Form 8-K filed with the  Securities and Exchange Commission on October 31, 1997.                                                                                      |
| (l) |   | Incorporated by  reference from the Registrant’s Report on Form 10-K filed with the  Securities and Exchange Commission on March 31, 2003.                                                                                       |
| (m) |   | Incorporated by  reference from the Registrant’s Report on Form 10-K/A filed with  the Securities and Exchange Commission on May 12, 2003.                                                                                       |
| (n) |   | Incorporated by  reference from the Registrant’s Proxy Statement filed with the Securities and  Exchange Commission on April 17, 2001.                                                                                                |
| (o) |   | Incorporated by  reference from the Registrant’s Report on Form 8-K filed with the  Securities and Exchange Commission on January 28, 1999.                                                                                      |
| (p) |   | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on May 10, 2004.                                                                                         |
| (q) |   | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on November 9, 2004.                                                                                     |
| (r) |   | Incorporated by  reference from the Registrant’s Report on Form 10-K filed with the  Securities and Exchange Commission on March 31, 1999.                                                                                       |
| (s) |   | Incorporated by  reference fro the Registrant’s Registration Statement on Form S-8  (Reg. No. 333-120505) filed with the Securities and Exchange  Commission on November 15, 2004.                                          |
| (t) |   | Incorporated by reference  from the Registrant’s Proxy Statement filed with the Securities and Exchange  Commission on April 18, 2003.                                                                                                |
| (u) |   | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on November 15, 1999.                                                                                    |
| (v) |   | Incorporated by  reference from the Registrant’s Registration Statement on Form S-8  (Reg. No. 333-87369) filed with the Securities and Exchange  Commission on September 17, 1999.                                         |

71

----

 
| (w)    |                                                                                        | Incorporated by reference from the Registrant’s  Registration Statement on Form S-4 (Reg. No. 333-80517)  filed with the Securities and Exchange Commission on June 11, 1999.      |
|--------|---------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (x)    |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on August 14, 2003.                                             |
| (y)    |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 8-K dated  June 24, 2003 filed with the Securities and Exchange Commission on  June 25, 2003.                      |
| (z)    |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 8-K/A dated  December 22, 1999 filed with the Securities and Exchange Commission on  January 7, 2000.              |
| (aa)   |                                                                                        | Incorporated by  reference from the Registrant’s Registration Statement on Form S-3  (Reg. No. 333-95177) filed with the Securities and Exchange  Commission on January 21, 2000.  |
| (bb)   |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on May 15, 2002.                                                |
| (cc)   |                                                                                        | Incorporated by reference from the Registrant’s  Registration Statement on Form S-8 (Reg. No. 333-44736)  filed with the Securities and Exchange Commission on August 29, 2000.    |
| (dd)   |                                                                                        | Incorporated by  reference from the Registrant’s Registration Statement on Form S-3  (Reg. No. 333-52326) filed with the Securities and Exchange  Commission on December 20, 2000. |
| (ee)   |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 10-K filed with the  Securities and Exchange Commission on March 23, 2001.                                              |
| (ff)   |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on August 14, 2001.                                             |
| (gg)   |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 10-Q filed with the  Securities and Exchange Commission on November 14, 2001.                                           |
| (hh)   |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 8-K dated March 4,  2002 filed with the Securities and Exchange Commission on March 8, 2002.                       |
| (ii)   |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 8-K dated  September 23, 2002 filed with the Securities and Exchange Commission on  October 1, 2002.               |
| (jj)   |                                                                                        | Incorporated by  reference from the Registrant’s Registration Statement on Form S-3  (Reg. No. 333-100707) filed with the Securities and Exchange  Commission on October 24, 2002. |
| (kk)   |                                                                                        | Incorporated by  reference from the Registrant’s Report on Form 8-K dated February 26,  2003 filed with the Securities and Exchange Commission on February 27,  2003.              |
|   | (b)   *Exhibits.  *See Item 15(a) above.                      |
|   | (c)   *Financial Statement Schedules.  *See  Item 15(a) above |

 

72

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Boardof Directors and Stockholders

SuperGen, Inc.

We have audited the accompanying consolidated balancesheets of SuperGen, Inc. as of December 31, 2004 and 2003, and therelated consolidated statements of operations, changes in stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2004. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements 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, 2004 and 2003 and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with U.S.generally accepted accounting principles.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of SuperGen, Inc.’s internal controlover financial reporting as of December 31, 2004, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 15,2005 expressed an unqualified opinion thereon.
|                       | /s/ Ernst & Young LLP |
|-----------------------|---------------------------|
| Palo Alto, California |
| March 15, 2005   |

 

F-1

----

**SUPERGEN, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share amounts)**
| ** **                                                                                                                                                               | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                                                                                               | ** ** |
| Current assets:                                                                                                                                                          |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                |       | $                     | 38,394     |   | $ | 5,055 |   |
| Marketable securities                                                                                                                                                    |       | 18,235                |       | 7,511 |   |
| Restricted cash and investments                                                                                                                                          |       | —                |       | 10,629 |   |
| Accounts receivable, net                                                                                                                                                 |       | 4,926                 |       | 507 |   |
| Development revenue receivable from MGI PHARMA, Inc.                                                                                                                     |       | 12,809                |       | — |   |
| Due from related parties                                                                                                                                                 |       | —                |       | 319 |   |
| Inventories                                                                                                                                                              |       | 3,306                 |       | 3,965 |   |
| Prepaid financing costs                                                                                                                                                  |       | —                |       | 1,811 |   |
| Prepaid expenses and other current assets                                                                                                                                |       | 1,403                 |       | 2,433 |   |
| Total current assets                                                                                                                                                     |       | 79,073                |       | 32,230 |   |
| Marketable securities, non-current                                                                                                                                       |       | 188                   |       | 1,921 |   |
| Investment in stock of related parties                                                                                                                                   |       | 798                   |       | 883 |   |
| Due from related parties, non-current                                                                                                                                    |       | 93                    |       | 118 |   |
| Property, plant and equipment, net                                                                                                                                       |       | 3,635                 |       | 4,420 |   |
| Developed technology at cost, net                                                                                                                                        |       | —                |       | 365 |   |
| Goodwill                                                                                                                                                                 |       | 731                   |       | 731 |   |
| Other intangibles, net                                                                                                                                                   |       | 677                   |       | 111 |   |
| Restricted cash and investments, non-current                                                                                                                             |       | 9,432                 |       | 13,927 |   |
| Other assets                                                                                                                                                             |       | 30                    |       | 30 |   |
| Total assets                                                                                                                                                             |       | $                     | 94,657     |   | $ | 54,736 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                            | ** ** |
| Current  liabilities:                                                                                                                                                    |       |                  |       |   |   |
| Accounts payable and accrued liabilities                                                                                                                                 |       | $                     | 4,644      |   | $ | 3,558 |   |
| Convertible debt, current portion, net of discounts                                                                                                                      |       | —                |       | 13,593 |   |
| Derivative liability                                                                                                                                                     |       | 1,607                 |       | 5,505 |   |
| Payable to AVI BioPharma, Inc.                                                                                                                                      |       | 565                   |       | 565 |   |
| Deferred revenue                                                                                                                                                         |       | 11,572                |       | — |   |
| Accrued payroll and employee benefits                                                                                                                                    |       | 2,129                 |       | 2,193 |   |
| Total current liabilities                                                                                                                                                |       | 20,517                |       | 25,414 |   |
| Deferred rent                                                                                                                                                            |       | 927                   |       | 808 |   |
| Deferred revenue, non-current                                                                                                                                            |       | —                |       | 1,667 |   |
| Total liabilities                                                                                                                                                        |       | 21,444                |       | 27,889 |   |
| 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; 51,127,314 and 37,022,356 shares issued and outstanding at December 31,  2004 and 2003, respectively |       | 51                    |       | 37 |   |
| Additional paid in capital                                                                                                                                               |       | 406,789               |       | 316,578 |   |
| Accumulated other comprehensive gain (loss)                                                                                                                              |       | (99                   | )          | (3,100 | ) |
| Accumulated deficit                                                                                                                                                      |       | (333,528              | )          | (286,668 | ) |
| Total stockholders’ equity                                                                                                                                          |       | 73,213                |       | 26,847 |   |
| Total liabilities  and stockholders’ equity                                                                                                                         |       | $                     | 94,657     |   | $ | 54,736 |   |

 

See accompanying notes to consolidated financial statements

F-2

----

**SUPERGEN,INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)**
| ** **                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues:                                                                                |       |                                       |       |   |   |   |   |
| Net product revenue                                                                      |       | $                                          | 13,127     |   | $ | 11,437 |   | $ | 14,188 |   |
| Development and license revenue from MGI PHARMA,  Inc.                                   |       | 18,866                                     |       | — |   | — |   |
| Other revenue                                                                            |       | —                                     |       | 57 |   | 1,081 |   |
| Total revenues                                                                           |       | 31,993                                     |       | 11,494 |   | 15,269 |   |
| Costs and operating  expenses:                                                           |       |                                       |       |   |   |   |   |
| Cost of product revenue                                                                  |       | 4,135                                      |       | 3,865 |   | 4,491 |   |
| Research and development                                                                 |       | 23,978                                     |       | 26,312 |   | 29,895 |   |
| Selling, general, and administrative                                                     |       | 28,800                                     |       | 24,436 |   | 23,525 |   |
| Total operating expenses                                                                 |       | 56,913                                     |       | 54,613 |   | 57,911 |   |
| Loss from operations                                                                     |       | (24,920                                    | )          | (43,119 | ) | (42,642 | ) |
| Interest income                                                                          |       | 624                                        |       | 474 |   | 1,662 |   |
| Interest expense                                                                         |       | (2,338                                     | )          | (3,981 | ) | — |   |
| Amortization of  deemed discount on convertible debt                                     |       | (12,657                                    | )          | (13,738 | ) | — |   |
| Other than  temporary decline in value of investments                                    |       | (7,851                                     | )          | — |   | (8,491 | ) |
| Change in  valuation of derivatives                                                      |       | 282                                        |       | 6,894 |   | — |   |
| Net loss                                                                                 |       | $                                          | (46,860    | ) | $ | (53,470 | ) | $ | (49,471 | ) |
| Basic and diluted net loss per common share                                              |       | $                                          | (1.04      | ) | $ | (1.56 | ) | $ | (1.52 | ) |
| Weighted average  shares used in basic and diluted net loss per common share calculation |       | 44,953                                     |       | 34,276 |   | 32,542 |   |

 

See accompanying notes to consolidated financial statements

F-3

----

**SUPERGEN,INC.****CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY****(in thousands)**
| ** **                                                                                                       | ** ** | ** **            | ** ** | ** **       | ** ** | ** **   | ** **   | ** **       | ** **        | ** **   | ** **           | ** **   | ** **  | ** ** | **Accumulated** | ** **   | ** ** | ** ** | ** **   | ** **   | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|--------------|--------------|------------------|-------------------|--------------|----------------------|--------------|-------------|------------|-----------------|--------------|------------|------------|--------------|--------------|------------|
| ** **                                                                                                       | ** ** | ** **            | ** ** | ** **       | ** ** | ** **   | ** **   | **Additional**   | ** **        | ** **   | ** **           | ** **   | ** **  | ** ** | **Other**       | ** **   | ** ** | ** ** | ** **   | ** **   | ** ** |
| ** **                                                                                                       | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Deferred** | ** **   | ** **       | **Comprehensive** | ** **   | **Accumulated**      | ** **   | ** **  | ** ** | ** **      |
| ** **                                                                                                       | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**  | ** **   | **Compensation** | ** **        | ** **   | **Gain (Loss)** | ** **   | **Deficit** | ** ** | ** **      | **Total**    | ** ** |
| Balances at  January 1, 2002                                                                                |       | 32,821                |       |             | $33        | *** *** |         |             | $284,115          | *** *** |                 |         | $(122       | )          |            |         |       | $          | 7,499        | *** *** |       |   | $(183,727 | ) |   |   | $107,798 |   |
| Comprehensive  loss:                                                                                             |       |                  |       |             |       | *** *** |         |             |              | *** *** |                 |         |        |       |            |         |       |       | *** *** |         |       |   |   |   |   |   |   |
| Net loss                                                                                                         |       | —                |       |             | —     | *** *** |         |             | —            | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | (49,471 | ) |   |   | (49,471 | ) |
| Other than  temporary decline in value of investments                                                            |       | —                |       |             | —     | *** *** |         |             | —            | *** *** |                 |         | —      |       |            |         |       | 8,491      | *** *** |         |       |   |   |   |   | 8,491 |   |
| Other  comprehensive loss––Change in unrealized gain (loss) on investments                             |       | —                |       |             | —     | *** *** |         |             | —            | *** *** |                 |         | —      |       |            |         |       | (16,786    | )            |         |       | — |   |   |   | (16,786 | ) |
| Comprehensive loss                                                                                               |       |                  |       |             |       | *** *** |         |             |              | *** *** |                 |         |        |       |            |         |       |       | *** *** |         |       |   |   |   |   | (57,766 | ) |
| Issuance of common  stock upon exercise of warrants and stock   options                                          |       | 9                     |       |             | —     | *** *** |         |             | 80                | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 80 |   |
| Issuance of common  stock in private placement, net of offering costs of $310                               |       | 1,806                 |       |             | 2          | *** *** |         |             | 4,204             | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 4,206 |   |
| Issuance of common  stock to Orphan Europe connection with research agreements                              |       | 65                    |       |             | —     | *** *** |         |             | 300               | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 300 |   |
| Issuance of common  stock in connection with employee stock purchase plan                                   |       | 78                    |       |             | —     | *** *** |         |             | 314               | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 314 |   |
| Compensation  expense from stock option grants to consultants and vendors                                        |       | —                |       |             | —     | *** *** |         |             | 169               | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 169 |   |
| Amortization of  deferred compensation                                                                           |       | —                |       |             | —     | *** *** |         |             |              | *** *** |                 |         | 75          |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 75 |   |
| Repurchase of  common stock                                                                                      |       | (1,886                | )          |             | (2         | )            |         |             | (7,172            | )            |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | (7,174 | ) |
| Balances at  December 31, 2002                                                                              |       | 32,893                |       |             | 33         | *** *** |         |             | 282,010           | *** *** |                 |         | (47         | )          |            |         |       | (796       | )            |         |       | (233,198 | ) |   |   | 48,002 |   |
| Comprehensive  loss:                                                                                             |       |                  |       |             |       | *** *** |         |             |              | *** *** |                 |         |        |       |            |         |       |       | *** *** |         |       |   |   |   |   |   |   |
| Net loss                                                                                                         |       | —                |       |             | —     | *** *** |         |             | —            | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | (53,470 | ) |   |   | (53,470 | ) |
| Other  comprehensive loss––Change in unrealized gain (loss) on investments                             |       | —                |       |             | —     | *** *** |         |             | —            | *** *** |                 |         | —      |       |            |         |       | (2,304     | )            |         |       | — |   |   |   | (2,304 | ) |
| Comprehensive loss                                                                                               |       |                  |       |             |       | *** *** |         |             |              | *** *** |                 |         |        |       |            |         |       |       | *** *** |         |       |   |   |   |   | (55,774 | ) |
| Issuance of common  stock upon conversion of senior convertible notes and payment of related  interest      |       | 3,889                 |       |             | 4          | *** *** |         |             | 16,706            | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 16,710 |   |
| Issuance of common  stock to Peregrine Pharmaceuticals in connection with license agreement                 |       | 62                    |       |             | —     | *** *** |         |             | 200               | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 200 |   |
| Issuance of common  stock upon exercise of stock options, net of 39 shares surrendered as  proceeds              |       | 361                   |       |             | —     | *** *** |         |             | 1,108             | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 1,108 |   |
| Issuance of common  stock in connection with employee stock purchase plan                                   |       | 83                    |       |             | —     | *** *** |         |             | 308               | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 308 |   |
| Amortization of  deferred compensation                                                                           |       | —                |       |             | —     | *** *** |         |             | —            | *** *** |                 |         | 6           |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 6 |   |
| Reversal of  deferred compensation due to employee termination                                                   |       | —                |       |             | —     | *** *** |         |             | (41               | )            |                 |         | 41          |       |            |         |       | —     | *** *** |         |       | — |   |   |   | — |   |
| Compensation  expense from stock option and warrant grants to consultants and vendors                            |       | —                |       |             | —     | *** *** |         |             | 250               | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 250 |   |
| Compensation  expense from issuance of warrants to placement agent of senior  convertible notes             |       | —                |       |             | —     | *** *** |         |             | 1,440             | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 1,440 |   |
| Beneficial  conversion of warrants issued in connection with issuance of senior  convertible notes          |       | —                |       |             | —     | *** *** |         |             | 13,995            | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 13,995 |   |
| Compensation  expense related to acceleration of stock option grants                                             |       | —                |       |             | —     | *** *** |         |             | 1,493             | *** *** |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | 1,493 |   |
| Repurchase of  common stock                                                                                      |       | (266                  | )          |             | —     | *** *** |         |             | (891              | )            |                 |         | —      |       |            |         |       | —     | *** *** |         |       | — |   |   |   | (891 | ) |
| Balances at  December 31, 2003                                                                              |       | 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           | *** *** |             |              | $            | 406,7899             | *** *** |        |       | $               | —  |       |       |         |         | $          | (999 | ) |   |   | $ | (333,5288 | ) |   |   | $ | 73,2133 |   |
|                                                                                                                  |            |                       |            |                  |            |              |              |                  |                   |              |                      |              |             |            |                 |              |            |            |              |              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements

F-4

----

**SUPERGEN,INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**
| ** **                                                                                        | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Operating  activities:                                                                            |       |                                       |       |   |   |   |   |
| Net loss                                                                                          |       | $                                          | (46,860    | ) | $ | (53,470 | ) | (49,471 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                      |       |                                       |       |   |   |   |   |
| Depreciation                                                                                      |       | 1,058                                      |       | 1,191 |   | 1,324 |   |
| Amortization of prepaid financing costs                                                           |       | 1,811                                      |       | 3,064 |   | — |   |
| Amortization of intangible assets                                                                 |       | 799                                        |       | 537 |   | 503 |   |
| Amortization of deferred compensation                                                             |       | —                                     |       | 6 |   | 75 |   |
| Amortization of deemed discount on convertible debt                                               |       | 12,657                                     |       | 13,738 |   | — |   |
| Amortization of deferred revenue                                                                  |       | (2,720                                     | )          | — |   | (1,000 | ) |
| Interest on convertible debt paid in common stock                                                 |       | 543                                        |       | 460 |   | — |   |
| Change in valuation of derivatives                                                                |       | (282                                       | )          | (6,894 | ) | — |   |
| Other than temporary decline in value of investments                                              |       | 7,851                                      |       | — |   | 8,491 |   |
| Stock compensation for modification of employee  options                                          |       | 654                                        |       | 1,493 |   | — |   |
| Expense related to stock options and warrants granted  to non-employees                           |       | 200                                        |       | 250 |   | 169 |   |
| Milestone, license, and research payments made in  common stock                                   |       | 700                                        |       | 200 |   | 300 |   |
| Write-off of investment in EpiGenX                                                                |       | —                                     |       | 250 |   | — |   |
| Cash option paid in modification of distribution  agreement                                       |       | —                                     |       | (500 | ) | — |   |
| Changes  in operating assets and liabilities:                                                     |       |                                       |       |   |   |   |   |
| Accounts receivable and development revenue  receivable                                           |       | (17,228                                    | )          | 4,898 |   | (2,896 | ) |
| Inventories                                                                                       |       | 659                                        |       | (1,799 | ) | (333 | ) |
| Prepaid expenses and other assets                                                                 |       | 1,030                                      |       | (521 | ) | (302 | ) |
| Due from related parties                                                                          |       | 344                                        |       | 355 |   | 199 |   |
| Restricted cash and investments                                                                   |       | (36                                        | )          | 229 |   | (122 | ) |
| Accounts payable and other liabilities                                                            |       | 1,141                                      |       | (40 | ) | (4,588 | ) |
| Deferred revenue                                                                                  |       | 13,138                                     |       | — |   | — |   |
| Net cash used in operating activities                                                             |       | (24,541                                    | )          | (36,553 | ) | (47,651 | ) |
| Investing  activities:                                                                            |       |                                       |       |   |   |   |   |
| Purchases of marketable securities                                                                |       | (37,612                                    | )          | (8,056 | ) | (32,494 | ) |
| Sales or maturities of marketable securities                                                      |       | 28,336                                     |       | 13,627 |   | 72,732 |   |
| Proceeds from convertible debt transferred to  restricted cash and investments                    |       | —                                     |       | (10,625 | ) | — |   |
| Purchase of intangible assets                                                                     |       | (1,000                                     | )          | — |   | — |   |
| Release of restricted cash from collateral account                                                |       | 10,680                                     |       | — |   | — |   |
| Purchases of property and equipment                                                               |       | (273                                       | )          | (168 | ) | (422 | ) |
| Net cash provided by (used in) investing activities                                               |       | 131                                        |       | (5,222 | ) | 39,816 |   |
| Financing  activities:                                                                            |       |                                       |       |   |   |   |   |
| Proceeds from issuance of common stock, net of  issuance costs                                    |       | 57,749                                     |       | 1,415 |   | 4,600 |   |
| Prepaid financing costs                                                                           |       | —                                     |       | (3,435 | ) |   |   |
| Proceeds from issuance of convertible debt                                                        |       | —                                     |       | 42,500 |   |   |   |
| Repurchases of common stock                                                                       |       | —                                     |       | (891 | ) | (7,174 | ) |
| Net cash provided by (used in) financing activities                                               |       | 57,749                                     |       | 39,589 |   | (2,574 | ) |
| Net increase (decrease) in cash and cash equivalents                                              |       | 33,339                                     |       | (2,186 | ) | (10,409 | ) |
| Cash and cash equivalents at beginning of period                                                  |       | 5,055                                      |       | 7,241 |   | 17,650 |   |
| Cash and cash equivalents at end of period                                                        |       | $                                          | 38,394     |   | $ | 5,055 |   | $ | 7,241 |   |
| Supplemental  Disclosure of Non-Cash Financing Activities:                                        |       |                                       |       |   |   |   |   |
| Valuation of warrants issued to placement agent in  connection with convertible debt transactions |       | $                                          | —     |   | $ | 1,440 |   | $ | — |   |
| Valuation of warrants issued to placement agent in  connection with license agreement             |       | $                                          | 513        |   | $ | — |   | $ | — |   |
| Beneficial conversion and deemed discount in  connection with convertible debt                    |       | $                                          | —     |   | $ | 26,395 |   | $ | — |   |
| Conversion of convertible notes into common stock                                                 |       | $                                          | 26,250     |   | $ | 16,250 |   | $ | — |   |
| Supplemental  Disclosure of Cash Flow Information:                                                |       |                                       |       |   |   |   |   |
| Interest expense  paid in cash during the year                                                    |       | $                                          | —     |   | $ | 440 |   | $ | — |   |

 

See accompanying notes to consolidated financial statements

F-5

----

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

**1. Summaryof Significant Accounting 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 two wholly-ownedsubsidiaries, which are immaterial. Intercompany accounts and transactions areeliminated in consolidation.

**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. Thefair value of accounts receivable, accounts payable, and convertible debt areconsidered to be representative of their respective fair values at December 31,2004 and 2003.

**Revenue Recognition**

Our net sales relate principally to two pharmaceuticalproducts, with Nipent sales representing 87% in 2004, 85% in 2003, and 89% in2002. We recognize sales revenue upon shipment and related transfer of title tocustomers, and collectibility is reasonably assured, with allowances providedfor bad debt and estimated returns. The allowances for bad debt and salesreturns were $275,000, $275,000, and $118,000 at December 31, 2004, 2003,and 2002, respectively. Actual amounts for returns and allowances may differfrom our estimates and such differences could be material to the consolidatedfinancial statements. The provision for the allowances was $63,000 in 2004,$691,000 in 2003, and $112,000 in 2002.

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. Deferred revenue represents the portion ofresearch payments received that has not been earned.

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 2004, 89% of our sales were made in the United States and 11%were made in the EU. In 2003 and 2002, 97% of our sales were made in the UnitedStates and 3 percent in the EU.

F-6

----

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

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

**Advertising Expense**

Advertising costs areexpensed as incurred. We incurred advertising costs of $424,000 in 2004,$319,000 in 2003, and $756,000 in 2002.

**Research andDevelopment**

Research and developmentexpenditures, including direct and allocated expenses, are charged to expenseas incurred. These expenditures include salaries and employee-related expenses;fees paid to physicians, hospitals, or other research institutions for clinicaland pre-clinical studies; fees paid to outside contractors for monitoring ofclinical sites or collection and analysis of data; costs associated with theresearch and manufacture of clinical drug supplies; and payments made undertechnology license agreements prior to regulatory approval of drug candidates.

**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 31,2004, we recorded a write-down of $7,851,000 related to other than temporarydecline in the value of our equity investment in AVI BioPharma, Inc. (“AVI”).During the year ended December 31, 2002, we recorded $8,491,000 related toother than temporary declines in the value of this investment and othermarketable securities. We had no such write-downs in 2003.

**Restricted Cash andInvestments**

Under certain operatinglease agreements and in connection with our convertible debt, we are requiredto set aside cash and/or investments as collateral. At December 31, 2004and 2003, we had $9,432,000 and $24,556,000, respectively, of restricted cashand investments related to such agreements.

**Equity Investments**

Equity investments insecurities without readily determinable fair value are carried at cost. Theseinvestments are included in marketable securities and investment in stock ofrelated parties on the balance sheet. We periodically review those carried atcost and evaluate whether an impairment has occurred. During 2003, wedetermined that the value of an equity investment that we made in 2002 wasimpaired due to the poor financial condition of the company. As a result, theentire cost of the investment of $250,000 

F-7

----

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

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

wascharged to Selling, general and administrative expense in 2003. We had no suchwrite-offs in 2004 or 2002. We believe the remaining equity investment amountscontinue to be realizable.

**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):
| ** **      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials   |       | $        | 83         |     | $          | 108 |   |
| Work in process |       | 1,040    |       | 2,481    |       |
| Finished goods  |       | 2,183    |       | 1,376    |       |
|            |       | $        | 3,306      |     | $          | 3,965 |   |

 

Bulk materials for ourprimary pharmaceutical product must be purified at a United States Food andDrug Administration (“FDA”) approved facility that meets stringent GoodManufacturing Practices standards. We had been using a single vendor to performthis manufacturing process using our own equipment located at the vendor’s site.We have contracted with a separate vendor to manufacture the Nipent finisheddosage at its approved facility. In addition, we store the majority of our bulkraw materials at a single storage location. Although there are a limited numberof vendors who may be qualified to perform these services, we believe thatother vendors could be engaged to provide similar services on comparable terms.However, the time required to locate and qualify other vendors or replace lostbulk inventory could cause a delay in manufacturing that might be financiallyand operationally disruptive. The companythat performed the manufacturing of Nipent went out of business in late 2004. However,we have contracted with another manufacturer to purify Nipent, and we do notanticipate any interruptions to our supply of drug available for sale.

**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, which range from 3 to 31 years. Leaseholdimprovements are amortized over the shorter of the life of the lease or theirestimated useful lives using the straight-line method.

Property,plant and equipment consist of the following at December 31 (inthousands):
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land and building                               |       | $        | 2,433      |     | $          | 2,433 |   |
| Leasehold  improvements                         |       | 2,607    |       | 2,592    |       |
| Equipment                                       |       | 983      |       | 962      |       |
| Furniture and  fixtures                         |       | 3,597    |       | 3,491    |       |
| Total property  and equipment                   |       | 9,620    |       | 9,478    |       |
| Less accumulated  depreciation and amortization |       | (5,985   | )          | (5,058   | )          |
| Property, plant and  equipment, net             |       | $        | 3,635      |     | $          | 4,420 |   |

 

F-8

----

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

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

**DevelopedTechnology**

Developed technologyrelated to the acquisition of Nipent is being amortized to cost of sales on aunits-manufactured basis over a period expected to approximate six years.Developed technology related to other acquired products is being amortized on astraight-line basis over five years. Cost basis of the developedtechnology was $1,936,000 at December 31, 2004 and 2003. Accumulatedamortization was $1,936,000 and $1,571,000 at December 31, 2004 and 2003,respectively.

**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 useful lives. Goodwill no longer subject toamortization amounted to approximately $731,000 at December 31, 2004 and 2003.

**Intangible Assets**

Intangible assets, including trademarks, covenants notto compete, and customer lists, are stated at cost and amortized on a straight-linebasis over their estimated useful lives of up to five years. Cost basis ofthese intangible assets was $787,000 at December 31, 2004 and 2003. Accumulatedamortization was $787,000 and $676,000 at December 31, 2004 and 2003,respectively.

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 Other intangibles in theaccompanying balance sheet. This amount is being amortized over 31 months, theestimated life of the benefit period. Accumulated amortization at December 31,2004 was $323,000. We expect to record amortization of $387,000 in 2005 and$290,000 in 2006.

**DerivativeFinancial Instruments**

We have issued warrants for common stock of anotherentity in connection with issuances of convertible debt. These warrants areconsidered to be a derivative financial instrument in accordance with Statementof Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments,” and are recorded at fair value. The changes in the fair value ofthe derivative financial instruments are recognized in current earnings in eachreporting period.

F-9

----

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

**1. Summary of SignificantAccounting Policies (Continued)**

**Major Customers**

Ourmajor customers include a number of buying groups. The percentage of sales ofeach of these major customers to total net sales for the years ended December 31were as follows:
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Customer A |       | 27       | %          | 15       | %          | 21       | %          |
| Customer B |       | 21       |       | 38       |       | 9        |       |
| Customer C |       | 12       |       | 3        |       | 2        |       |
| Customer D |       | 8        |       | 8        |       | 25       |       |
| Customer E |       | 8        |       | 24       |       | 6        |       |
| Customer F |       | 4        |       | —   |       | 15       |       |
| All others |       | 20       |       | 12       |       | 22       |       |
| Total      |       | 100      | %          | 100      | %          | 100      | %          |

 

**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 we have reportedoperating losses each period since our inception, the effect of assuming theexercise of options and warrants and assumed conversion of convertible debtwould be anti-dilutive and, therefore, basic and diluted loss per shareare the same. The computation of diluted net loss per share for the year ended December 31,2004 excludes the impact of options to purchase 6,502,052 shares of commonstock and warrants to purchase 7,183,319 shares of common stock. Thecomputation of diluted net loss per share for the year ended December 31,2003 excludes the impact of options to purchase 5,326,349 shares of commonstock, warrants to purchase 6,834,808 shares of common stock, and 4,515,671shares of common stock issuable upon conversion of senior convertible notes. Thecomputation of diluted net loss per share for the year ended December 31,2002 excludes the impact of options to purchase 4,535,457 shares of commonstock and warrants to purchase 4,185,889 shares of common stock.

**Stock-BasedCompensation**

We account for stock issued toemployees in accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) and comply with the disclosureprovisions of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”) and Statement of FinancialAccounting Standards No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure” (“SFAS 148”). Under APB 25, compensation expense of fixed stockoptions is based on the difference, if any, on the date of the grant betweenthe fair value of our stock and the exercise price of the option. We accountfor stock issued to non-employees in accordance with the provisions of SFAS 123and EITF No. 96-18*,*“Accountingfor Equity Instruments That are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services.”

Under the intrinsic valuemethod, when the exercise price of our employee stock options equals the marketprice of the underlying stock on the date of grant, no compensation expense isrecognized. The following table illustrates the pro forma effect on net lossand loss per share for the years ended 

F-10

----

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

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

December 31, 2004, 2003 and 2002 had we appliedthe fair value method to account for stock-based awards to employees (inthousands, except per share amounts):
| ** **                                                                                                                                                                  | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net loss, as  reported                                                                                                                                                      |       | $                                          | (46,860    | ) | $ | (53,470 | ) | $ | (49,471 | ) |
| Add: Stock-based  employee compensation expense included in the determination of net loss, as  reported                                                                     |       | 654                                        |       | 1,499 |   | 75 |   |
| 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 |       | (8,266                                     | )          | (5,901 | ) | (3,991 | ) |
| Pro forma net loss                                                                                                                                                          |       | $                                          | (54,472    | ) | $ | (57,872 | ) | $ | (53,387 | ) |
| Basic and diluted net  loss per common share:                                                                                                                               |       |                                       |       |   |   |   |   |
| As reported                                                                                                                                                                 |       | $                                          | (1.04      | ) | $ | (1.56 | ) | $ | (1.52 | ) |
| Pro forma                                                                                                                                                                   |       | $                                          | (1.21      | ) | $ | (1.69 | ) | $ | (1.64 | ) |

 

**Impairment ofLong-lived Assets**

We evaluate long-livedassets, other than goodwill, for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not berecoverable based on expected undiscounted cash flows attributable to thatasset. The amount of any impairment is measured as the difference between thecarrying value and the fair value of the impaired asset. No impairment existsas of December 31, 2004.

**Reclassification**

We have reclassifiedinterest receivable on equity and debt securities at December 31, 2003from current and non-current marketable securities and restricted cash to othercurrent assets to conform to the current year presentation.

**Recent AccountingPronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards123R, “Share-Based Payment—An Amendment of FASB Statements No. 123 and 95”(“SFAS 123R”), which eliminated the ability to account for share-basedcompensation transactions using APB 25. SFAS 123R will instead requirecompanies to recognize compensation expense, using a fair-value based method,for costs related to share-based payments including stock options and employeestock purchase plans. SFAS 123R is effective for public companies in periodsbeginning after June 15, 2005. We will be required to implement thestandard no later than the quarter that begins July 1, 2005. Thecumulative effect of adoption, if any, applied on a modified prospective basis,would be measured and recognized on July 1, 2005. Current estimates ofoption values using the Black Scholes method (as shown above) may not beindicative of results from valuation methodologies ultimately adopted. Theadoption of SFAS 123R will have a material impact on our results of operations.We are currently evaluating which method we will use to adopt SFAS123R.

F-11

----

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

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

In March 2004, theFASB approved Emerging Issues Task Force (EITF) Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” The objective of this issue is to provide guidance foridentifying other-than-temporarily impaired investments. EITF No. 03-1also provides new disclosure requirements for investments that are deemed to betemporarily impaired. In September 2004, the FASB issued EITF No. 03-1-1,which delayed the effective date of EITF No. 03-1, with the exception ofcertain disclosure requirements. We do not believe that the adoption of EITF No. 03-1will have a material impact on our financial condition and results ofoperations.

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

Thefollowing is a summary of available-for-sale securities (in thousands):
| ** **                       | ** ** | **Amortized        Cost      ** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| **At December 31, 2004**    |       |                                                                                        |       |                         |       |                          |       |            |       |   |   |   |   |   |   |
| U.S. corporate  debt securities  |       |                                                                                        | $          | 35,845                       |       |                          |       | $               | —     |   |   |   | $ | (3 | ) |   | $ | 35,842 |   |
| U.S. government  debt securities |       |                                                                                        | 16,111     |                         |       |                          | 1          |            |       |   | (15 | ) |   | 16,097 |   |
| Marketable equity  securities    |       |                                                                                        | 6,577      |                         |       |                          | 59         |            |       |   | (140 | ) |   | 6,496 |   |
| Total                            |       |                                                                                        | $          | 58,533                       |       |                          |       | $               | 60         |   |   |   | $ | (158 | ) |   | $ | 58,435 |   |
| **At  December 31, 2003:**  |       |                                                                                        |       |                         |       |                          |       |            |       |   |   |   |   |   |   |
| U.S. corporate  debt securities  |       |                                                                                        | $          | 9,174                        |       |                          |       | $               | 17         |   |   |   | $ | (1 | ) |   | $ | 9,190 |   |
| U.S. government  debt securities |       |                                                                                        | 14,127     |                         |       |                          | 6          |            |       |   | (1 | ) |   | 14,132 |   |
| Marketable equity  securities    |       |                                                                                        | 14,427     |                         |       |                          | 247        |            |       |   | (3,368 | ) |   | 11,306 |   |
| Total                            |       |                                                                                        | $          | 37,728                       |       |                          |       | $               | 270        |   |   |   | $ | (3,370 | ) |   | $ | 34,628 |   |

** **

F-12

----

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

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

Theavailable-for-sale securities are classified on the balance sheet as follows(in thousands):
| ** **                                                        | ** ** | **Amortized        Cost      ** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| **At December 31, 2004**                           |       |                                                                                        |       |                         |       |                          |       |            |       |   |   |   |   |   |   |
| Amounts included  in cash and cash equivalents                    |       |                                                                                        | $          | 33,704                       |       |                          |       | $               | 1          |   |   |   | $ | (1 | ) |   | $ | 33,704 |   |
| Marketable  securities, current                                   |       |                                                                                        | 18,252     |                         |       |                          | —     |            |       |   | (17 | ) |   | 18,235 |   |
| Amounts included  in investment in stock of related parties  |       |                                                                                        | 120        |                         |       |                          | —     |            |       |   | (2 | ) |   | 118 |   |
| Amounts included  in restricted cash and investments              |       |                                                                                        | 6,322      |                         |       |                          | —     |            |       |   | (132 | ) |   | 6,190 |   |
| Marketable  securities, non-current                               |       |                                                                                        | 135        |                         |       |                          | 59         |            |       |   | (6 | ) |   | 188 |   |
| Total                                                             |       |                                                                                        | $          | 58,533                       |       |                          |       | $               | 60         |   |   |   | $ | (158 | ) |   | $ | 58,435 |   |
| **At  December 31, 2003**                                    |       |                                                                                        |       |                         |       |                          |       |            |       |   |   |   |   |   |   |
| Amounts included  in cash and cash equivalents                    |       |                                                                                        | $          | 3,643                        |       |                          |       | $               | —     |   |   |   | $ | — |   |   | $ | 3,643 |   |
| Marketable  securities, current                                   |       |                                                                                        | 7,501      |                         |       |                          | 11         |            |       |   | (1 | ) |   | 7,511 |   |
| Amounts included  in investment in stock of related parties  |       |                                                                                        | 265        |                         |       |                          | —     |            |       |   | (62 | ) |   | 203 |   |
| Amounts included  in restricted cash and investments              |       |                                                                                        | 24,654     |                         |       |                          | 3          |            |       |   | (3,307 | ) |   | 21,350 |   |
| Marketable  securities, non-current                               |       |                                                                                        | 1,665      |                         |       |                          | 256        |            |       |   | — |   |   | 1,921 |   |
| Total                                                             |       |                                                                                        | $          | 37,728                       |       |                          |       | $               | 270        |   |   |   | $ | (3,370 | ) |   | $ | 34,628 |   |

 

Available-for-salesecurities at December 31, by contractual maturity, are shown below (inthousands):
| ** **                             | ** ** | **Fair Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **2004**            | ** ** | **2003** | ** ** |
| Debt securities                        |       |                |       |   |   |
| Due in one year or less                |       | $                   | 51,939     |   | $ | 21,783 |   |
| Due after one year through three years |       | —              |       | 1,539 |   |
|                                   |       | 51,939              |       | 23,322 |   |
| Marketable equity  securities          |       | 6,496               |       | 11,306 |   |
| Total                                  |       | $                   | 58,435     |   | $ | 34,628 |   |

 

Realized gains and losses on the sale ofavailable-for-sale securities for the years ended December 31, 2004, 2003,and 2002 were not material.

During the year ended December 31,2004, we recorded a write-down of $7,851,000 related to other than temporarydecline in the value of our equity investment in AVI BioPharma, Inc. Duringthe year ended December 31, 2002, we recorded $8,491,000 related to otherthan temporary declines in the value of this investment and other marketablesecurities. We had no such write-downs in 2003.

F-13

----

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

**3. Stockholders’ Equity**

**Private Placement**

On March 5, 2004, we entered into a SecuritiesPurchase Agreement with several investors for the private placement of sharesof unregistered common stock and warrants. In connection with this agreement,we issued 4,900,000 shares of our common stock to the investors at a per shareprice of $7.00, for an aggregate purchase amount of $34,300,000, and warrantsto purchase 735,000 shares of our common stock. The warrants have a term offive years and a per share exercise price of $10.00. As compensation to theplacement agent, we paid the placement agent $1,735,000 in cash, which wastreated as part of the cost of the offering. Net proceeds from the offeringwere $32,525,000.

The common stock andwarrants we issued in the private placement transaction were initiallyunregistered. We filed a registration statement on Form S-3 with theSecurities and Exchange Commission (“SEC”) on March 23, 2004 to registerthe shares issued in the private placement as well as the shares to be issuedupon exercise of the warrants. In accordance with EITF 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,” the warrants were included as a liability and valued atfair market value until we met the criteria under EITF 00-19 forpermanent equity. We valued the warrants at $3,307,000 on March 5, 2004using the Black-Scholes method with the following assumptions: a risk-freeinterest rate of 2.81%, volatility of 0.89, and a dividend yield of 0%. Theregistration statement on Form S-3 was declared effective by the SECon March 31, 2004. We re-valued the warrants on that date at $6,923,000using the Black-Scholes method with the following assumptions: a risk-freeinterest rate of 2.81%, volatility of 0.89, and a dividend yield of 0%. Thewarrants were then transferred to permanent equity, and the change in the valueof the warrant liability between March 5, 2004 and March 31, 2004, or$3,616,000, was charged to Change in valuation of derivatives in theaccompanying statement of operations.

**Warrants**

At December 31,2004, warrants to purchase the following shares of our common stock wereoutstanding:
| **Number of  Shares** | ** ** | ** **     | ** **     | **Exercise  Price** | ** ** | **Issue  Date** | ** ** | **Expiration  Date** | ** ** |
|----------------------------|------------|----------------|----------------|---------------------|------------|-----------------|------------|----------------------|------------|
| 1,924,400                  |       | $              | 3.00–4.25 |                | 2002       |            |       | 2006                 |       |   |
| 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       |                 |       |
| 200,000                    |       | 10.47          |           | 2001                |       |            | 2006       |                 |       |
| 100,000                    |       | 10.47          |           | 2003                |       |            | 2007       |                 |       |
| 1,045,000                  |       | 13.50          |           | 1997                |       |            | 2007       |                 |       |
| 7,183,319                  |       |           |           |                |       |            |       |                 |       |
|                            |            |                |                |                     |            |                 |            |                      |            |  |  |  |

 

F-14

----

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

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

In September 2000, we acquired all of theintellectual property of AMUR Pharmaceuticals, Inc. in exchange for 37,795shares of our common stock and two-year warrants to purchase 200,000 shares ofour common stock at $40.00 per share. In September 2002, we extended theterms of the two-year warrants to purchase 200,000 shares of our common stockby two additional years. We calculated the Black-Scholes valuation of thiswarrant extension at $2,000, which we charged to Research and developmentexpense in 2002. These warrants expired unexercised in 2004.

In March 2001, weentered into agreements with The Kriegsman Group (“Kriegsman”) (also see Notes6 and 9 below) to perform certain financial consulting and public relations services.In connection with these agreements, we issued the consultant a three-yearwarrant to purchase 200,000 shares of unregistered common stock at an exerciseprice of $10.47. We calculated the value of the warrant at $758,000 using theBlack-Scholes valuation model, utilizing an expected volatility of 0.762,risk-free interest rate of 5.88%, and expected life of three years. The warrantwas fully vested in 2001, and the value of the warrant of $758,000 was chargedto Selling, general and administrative expense in 2001. In February 2003,we extended the expiration date of this warrant by three years, and issued theconsultant another four-year warrant to purchase 100,000 shares of unregisteredcommon stock at an exercise price of $10.47. We calculated the value of thewarrant extension and the new warrant grant at $249,000, using an expectedvolatility of 0.844, risk-free interest rate of 4.12%, and expected life of twoadditional years for the extended warrant and four years for the new warrant. Thevalue of our stock on the date of the extension and new grant was $3.00. Thevalue of the warrant extension and new warrant grant was charged to Selling,general and administrative expense in 2003.

**Stock Reserved forFuture Issuance**

At December 31,2004, we have reserved shares of common stock for future issuance as follows:
| Stock options  outstanding                         |   | 6,502,052  |   |
|----------------------------------------------------|--------|------------|--------|
| Stock options  available for grant                 |   | 870,912    |   |
| Warrants to  purchase common stock                 |   | 7,183,319  |   |
| Shares available  for Employee Stock Purchase Plan |   | 178,813    |   |
|                                               |   | 14,735,096 |   |

 

**Stock RepurchasePlan**

In September 2000, the SuperGen Board ofDirectors authorized a stock repurchase plan to acquire, in the open market, anaggregate of up to 1,000,000 shares of our common stock, at prices not toexceed $22.00 per share or $20,000,000 in total. In March 2001 and September 2002,the Board authorized increases in the number of shares to be acquired under therepurchase plan, but maintained the $20,000,000 repurchase total.

No shares were repurchasedduring the year ended December 31, 2004. During the year ended December 31,2003, we repurchased 266,000 shares of our common stock at a cost, net ofcommissions, of $891,000. Since inception of the stock repurchase plan, we haverepurchased 3,299,000 shares of our common stock at a cost, net of commissions,of $19,579,000. All shares repurchased have been retired.

F-15

----

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

**4. Stock Option Plans**

We have 10,263,000 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. Thenumber of shares to be purchased, their price, and the terms of payment aredetermined by the Company’s Board of Directors, provided that the exerciseprice for incentive stock options cannot be less than the fair market value onthe date of grant. The options granted generally expire ten years after thedate of grant and become exercisable at such times and under such conditions asdetermined by the Board of Directors (generally over a four or five yearperiod).

A summary of the Company’sstock option activity and related information follows:
| ** **                         | ** ** | **Options Outstanding** | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average Fair  Value At  Grant Date** | ** ** |
| Balance at  January 1, 2002   |       | 3,705,962                    |       |   | $ | 13.57 |   |   | 2,679,490 |   |   |   |   |   |
| Granted at fair  value             |       | 1,314,300                    |       |   | 3.71 |   |   |   |   |   | $ | 2.53 |   |   |
| Exercised                          |       | (833                         | )          |   | 6.50 |   |   |   |   |   |   |   |   |
| Forfeited                          |       | (483,972                     | )          |   | 17.62 |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2002 |       | 4,535,457                    |       |   | 10.28 |   |   | 3,188,761 |   |   |   |   |   |
| Granted at fair  value             |       | 1,405,450                    |       |   | 4.61 |   |   |   |   |   | 3.28 |   |   |
| Exercised                          |       | (400,488                     | )          |   | 3.80 |   |   |   |   |   |   |   |   |
| Forfeited                          |       | (214,070                     | )          |   | 8.61 |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2003 |       | 5,326,349                    |       |   | 9.34 |   |   | 4,080,995 |   |   |   |   |   |
| Granted at fair  value             |       | 1,861,050                    |       |   | 9.85 |   |   |   |   |   | 6.40 |   |   |
| Exercised                          |       | (325,801                     | )          |   | 4.30 |   |   |   |   |   |   |   |   |
| Forfeited                          |       | (359,546                     | )          |   | 11.07 |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2004 |       | 6,502,052                    |       |   | $ | 9.64 |   |   | 4,951,378 |   |   |   |   |   |
|                                    |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Informationconcerning the options outstanding at December 31, 2004 is as follows:
| ** **  | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|-------------|------------|------------------------------|------------|------------------------------|------------|
| **Range**   | ** ** | ** **                   | ** ** | **Number**                   | ** ** | **Weighted  average  exercise  price** | ** ** | **Weighted  average  remaining  contractual life** | ** ** | **Number  exercisable** | ** ** | **Weighted  average  exercise  price** | ** ** |
| $ 1.75 | to         | $ 4.10                  |            |                         | 1,198,497  |   |   | $ | 3.19 |   |   |   | 7.64 |   |   | 1,014,600 |   |   | $ | 3.28 |   |   |
| 4.12        | to         | 6.10                         |            |                         | 1,458,785  |   |   | 5.38 |   |   |   | 5.17 |   |   | 1,313,841 |   |   | 5.37 |   |   |
| 6.16        | to         | 11.22                        |            |                         | 1,097,295  |   |   | 8.28 |   |   |   | 7.31 |   |   | 709,544 |   |   | 8.52 |   |   |
| 11.27       | to         | 12.63                        |            |                         | 1,590,635  |   |   | 11.44 |   |   |   | 8.19 |   |   | 769,345 |   |   | 11.61 |   |   |
| 12.69       | to         | 68.00                        |            |                         | 1,156,840  |   |   | 20.51 |   |   |   | 3.96 |   |   | 1,144,048 |   |   | 20.60 |   |   |
| $ 1.75 | to         | $ 68.00                 |            |                         | 6,502,052  |   |   | $ | 9.64 |   |   |   | 6.51 |   |   | 4,951,378 |   |   | $ | 9.88 |   |   |

 

F-16

----

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

**4. StockOption Plans (Continued)**

Pro forma informationregarding the results of operations and net loss per share (Note 1) isdetermined as if we had accounted for our employee stock options using the fairvalue method. Under this method, the fair value of each option granted isestimated on the date of grant using the Black-Scholes option valuation model. Weestimated the fair value for these options at the date of grant using the Black-Scholesmodel with the following assumptions: 
| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Risk-free interest  rate |       | 2.21                                       | %          | 2.73 | % | 4.17 | % |
| Dividend yield           |       | —                                     |       | — |   | — |   |
| Expected volatility      |       | 0.804                                      |       | 0.865 |   | 0.834 |   |
| Expected life (in years) |       | 5.0                                        |       | 5.0 |   | 5.0 |   |

 

The Black-Scholes option valuation model was developedfor use in estimating the fair value of traded options that have no vestingrequirements and are fully transferable. Employee stock options havecharacteristics significantly different than those of traded options. Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility and changes in thesubjective input assumptions can materially affect the estimate of fair valueof an employee stock option.

During the year ended December 31, 1999, in connectionwith the grant of certain stock options to employees and officers, we recordeddeferred stock compensation for financial statement reporting purposes of$947,000, representing the difference between the exercise price and the deemedfair value of our common stock for financial reporting purposes on the date thestock options were granted. Deferred compensation was included as a componentof stockholders’ equity and was amortized to expense on a straight line basisover four years, the vesting period of the options. During the years endedDecember 31, 2003 and 2002, we recorded amortization of deferred stockcompensation expense of $6,000, and $75,000, respectively. During the yearended December 31, 2003, we reversed $41,000 of deferred compensation,representing the value of unvested stock options forfeited upon the departureof an officer of the Company. We had no similar expenses during the year endedDecember 31, 2004.

During the years endedDecember 31, 2004 and 2003, we recorded non cash charges of $654,000 and$1,499,000, respectively for stock compensation related to the modification andacceleration of options associated with the change in status or departure ofcertain Company management.

**5. Convertible DebtFinancing Transactions**

**February 2003Convertible Debt Transaction**

On February 26, 2003we entered into a Securities Purchase Agreement for the private placement ofSenior Exchangeable Convertible Notes (“February Notes”) in the principalamount of $21.25 million and related warrants. The February Notes accruedinterest at a rate of 4% per year. The principal amount of the February Noteswas repayable in four equal quarterly installments beginning nine months afterthe closing of the transaction. The February Notes were, at the option ofthe investors, in whole or in part, (a) convertible into shares of ourcommon stock at a fixed conversion price of $4.25 per share, and (b) exchangeablefor up to 2,634,211 shares of common stock of AVI that we own (the “AVI Shares”)at a fixed exchange price of $5.00 per share.

F-17

----

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

**5. Convertible DebtFinancing Transactions (Continued)**

**June 2003Convertible Debt Transaction and February Notes Restructuring**

On June 24, 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, 2004, and accrued interest ata rate of 4% per year. Pursuant to the terms of the June Notes, the noteholders could elect to convert, at any time prior to maturity, their June Notesinto shares of our common stock at a fixed price $6.36, which was calculatedbased on the trading prices of our common stock for the twenty trading daysafter issuance of the June Notes.

Concurrent with the issuance of the June Notes,we restructured our outstanding February Notes. Pursuant to therestructuring, the holders of the February Notes converted half of theprincipal amount into shares of our common stock at the fixed conversion priceof $4.25, thereby causing the remaining $10,625,000 principal amount of theoutstanding February Notes to have a final maturity date of February 26,2004. The remaining February Notes were amended to remove the featurepermitting the holders to exchange such notes into the AVI Shares at anexchange price of $5.00, and to remove our ability to use the AVI Shares valuedat market at the time of repayment to repay the outstanding principal amount. However,in connection with the issuance of the June Notes and the restructuring ofthe February 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 warrantsrepresent a derivative under SFAS 133 that must be recorded at fair value. Changesin the fair value of the derivative are recognized in earnings. During yearsended December 31, 2004 and 2003, we recorded changes in the value of thisderivative of $3,898,000 and $4,557,000, respectively.

While the full amount of the $21,250,000 proceeds fromthe June Notes was transferred to SuperGen, $10,625,000 of such funds wereplaced into an interest bearing collateral account, and not available for ouruse until release. Absent certain defaults by us, $5,312,500 (one-half of the$10,625,000) was to be available to us on March 24, 2004, and theremaining $5,312,500 was to be available on June 24, 2004. In connectionwith the private placement transaction completed in March 2004 (see Note 3above), the holders of the June Notes released the entire $10,625,000 plusaccrued interest from the collateral account.

In connection with the issuance of the warrants toacquire the 2,634,211 AVI Shares, we pledged the AVI Shares into a collateralaccount. The fair value of the AVI Shares is included in the accompanyingconsolidated balance sheet under non-current Restricted cash and investments.We also hold an additional 50,000 shares of AVI, which are included in theaccompanying December 31, 2004 balance sheet in Investment in stock ofrelated parties. We continue to hold all of the pledged and unpledged AVIShares and reflect temporary changes in those share values in accumulated othercomprehensive loss. During 2004 we recorded a write-down of $7,851,000 relatedto an other than temporary decline in the value of our investment in AVI. Wehad no such write down in 2003.

During the years ended December 31, 2004 and2003, we issued 4,750,000 and 3,889,000 shares of our common stock,respectively, in payment of principal and interest on the February and June Notes.As of December 31, 2004, all principal from both the February Notesand June Notes was repaid.

In connection with the February and June convertiblenote transactions, we recorded prepaid financing costs related to the placementagent fees, legal fees, and other cost associated with the transactions. Duringthe years ended December 31, 2004 and 2003, we recorded amortization ofthe 

F-18

----

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

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

prepaid financing coststotaling $1,811,000 and $3,064,000, respectively, to interest expense. At December 31,2004, all prepaid financing costs had been fully amortized.

Also in connection withthe February and June convertible note transactions, we recordeddeemed discounts on the convertible debt. During the years ended December 31,2004 and 2003, we recorded amortization of the deemed discount on convertibledebt of $12,657,000 and $13,738,000, respectively.

**6. Stock Purchase and LicenseAgreements with MGI PHARMA, Inc.**

On August 31, 2004, we entered into threeagreements with MGI PHARMA, Inc., a Minnesota corporation (“MGI”): (1) acommon stock purchase agreement (the “Stock Purchase Agreement”) for the saleof 4,000,000 shares of our common stock at a cash price per share of $10.00; (2) alicense agreement relating to DacogenTM (decitabine) (the “License Agreement”);and (3) an investor rights agreement that obligates us, within the firstanniversary of the closing date of the transactions contemplated by the StockPurchase Agreement, to file with the Securities and Exchange Commission aregistration statement registering the common stock for resale, and to usecommercially reasonable efforts to cause the registration statement to becomeeffective within such time period. The agreements became effective on September 21,2004.

Dacogen is our investigational anti-cancer therapeuticwhich is currently in clinical trials for the treatment of patients withmyelodysplastic syndrome (“MDS”). Pursuant to the terms of the LicenseAgreement, MGI received exclusive worldwide rights to the development,commercialization and distribution of Dacogen for all indications. We willcontinue to pursue regulatory approvals of Dacogen for the treatment of MDS inthe United States and Europe, with assistance from MGI, provided that alldevelopment of Dacogen will be transitioned to MGI no later than the end of2005. MGI will assume full development responsibilities following thetransition to them. MGI is required to fund further development costsassociated with Dacogen at a minimum of $15 million over a three year period. Inaddition to MDS, MGI will pursue development of Dacogen for other indications. Ifspecified regulatory and commercialization milestones are achieved, MGI willpay us up to $45 million based upon the achievement of such milestones. Subjectto certain limitations, MGI will also pay us 50% of certain revenue payable toMGI as a result of MGI sublicensing rights to market, sell, and/or distributeDacogen, to the extent such revenues are in excess of the milestone payments. Wewill receive a royalty starting at 20% and escalating to a maximum of 30% onannual worldwide net sales of licensed products.

In accordance with the Stock Purchase Agreementdescribed above, we issued 4,000,000 shares of our common stock to MGI at$10.00 per share, for aggregate proceeds totaling $40,000,000. In connectionwith this transaction, we paid the placement agent, The Kriegsman Group,$3,200,000 in cash and issued Kriegsman a warrant exercisable for 400,000shares of our common stock at an exercise price of $10.00 per share. Thewarrant will be exercisable for a term of five years, and we were obligated toregister for resale the common stock issuable upon exercise of the warrant. Wecalculated the fair value of the warrant issued to Kriegsman at $1,436,000,using the Black-Scholes model with a volatility of 0.83, expected life of fiveyears, dividend yield of 0%, and risk free interest rate of 3.29%. We haveallocated the aggregate proceeds and related costs of the placement agent feeand warrant valuation between equity, for the portion attributable to the StockPurchase Agreement, and deferred revenue, for the portion attributable to theLicense Agreement. On August 31, 2004, the date that the Stock PurchaseAgreement was executed, the fair value of our common stock, based on theclosing price on the NASDAQ National Market, was $6.43 

F-19

----

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

**6. StockPurchase and License Agreements with MGI PHARMA, Inc. (Continued)**

per share. Therefore, weallocated $23,662,000, the fair value of 4,000,000 shares of our common stockat $6.43 per share, net of related offering costs, to equity, with theremaining $12,625,000 being allocated to deferred revenue. The deferred revenueis being amortized to license revenue over 15 months, which is the period oftime in which our development obligations for Dacogen would transfer to MGI. Duringthe year ended December 31, 2004, we recorded amortization of deferredrevenue $2,720,000 to Development and license revenue on the accompanyingstatement of operations.

Under the terms of theLicense Agreement, MGI is obligated to pay us milestone payments forachievement of certain regulatory and commercialization goals, as well asreimburse us for certain development and allocated overhead costs of Dacogenuntil we receive marketing authorization. During the year ended December 31,2004, we recognized development revenue of $12,500,000 for milestoneachievement and $3,646,000 relating to the reimbursements under this agreement.

**7. Acquisition Activity**

**PeregrinePharmaceuticals—VEGF License**

In February 2001, we completed a transaction tolicense a platform drug-targeting technology known as Vascular Targeting Agent(“VTA”) from Peregrine Pharmaceuticals, formerly known as Techniclone Corp. Thelicensed technology is specifically related to Vascular Endothelial GrowthFactor (“VEGF”). The agreement required an up-front payment of $600,000, whichincluded the acquisition of 150,000 shares of Peregrine. These shares arecarried as part of Marketable Securities—non-current.

The terms of the agreementrequire that we pay milestone payments and royalties to Peregrine based on thenet revenues of any drugs commercialized using the VEGF technology. Thesepayments could ultimately total $8 million. No milestone or royalty paymentshave been made under the agreement to date. In addition, we are required to payPeregrine an annual license fee of $200,000 per year until the first filing ofan Investigational New Drug Application utilizing the licensed patents. Duringthe years ended December 31, 2004 and 2003, we paid the annual licensefees of $200,000 to Peregrine in shares of our common stock. We issuedPeregrine 18,454 and 61,653 shares of unregistered stock in 2004 and 2003, respectively,which were calculated based on the average price of our common stock during the30-day period preceding the payment date. During the year ended December 31,2002, we paid Peregrine $200,000 in cash in connection with this agreement. Theannual license fees paid to Peregrine have been charged to Research anddevelopment expense.

**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 ended December 31,2004, 2003, and 2002, we recorded expenses of $100,000, $100,000, and $274,000,respectively, in connection with the research agreement, which we have chargedto Research and development expense.

F-20

----

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

**7.Acquisition Activity (Continued)**

**Orathecin**

In September 1997, we acquired exclusiveworldwide rights to a patented anticancer compound, Orathecin, from the StehlinFoundation for Cancer Research (“Stehlin”). We also agreed to make monthly cashpayments to Stehlin of $100,000 until the earlier of the date of FDA marketingapproval of Orathecin or four years. Our agreement with Stehlin also calls foradditional payments in SuperGen common stock upon the achievement of specifiedmilestones and 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, weincreased our monthly cash payments to $200,000 for 2000 and 2001 and arerequired to seek commercial applications for Orathecin. We were required to payStehlin approximately $9.6 million for research and must make cash royaltypayments and cash or stock milestone payments to Stehlin as we develop andcommercialize Orathecin. In accordance with these agreements, we paid Stehlin$800,000 in 2003 and $1,200,000 in 2002 and had paid Stehlin all of the $9.6million required for research. During the year ended December 31, 2004, wefiled a New Drug Application for Orathecin with the FDA. This triggered arequired milestone payment to Stehlin of $500,000. We made the milestonepayment through the issuance of 63,969 shares of unregistered common stock,which was calculated based on the average trading price of our stock during the30-day period preceding the payment date.

**8. Termination ofAgreements with Abbott Laboratories**

In December 1999, we entered into two agreementswith Abbott Laboratories (“Abbott”), a Common Stock and Option PurchaseAgreement and a Worldwide Sales, Distribution and Development Agreementrelating to Orathecin. Under these agreements, Abbott was to invest in sharesof our common stock and would participate with us in the marketing anddistribution of Orathecin. We would have co-promoted Orathecin with Abbott inthe United States and Abbott would have had exclusive rights to marketOrathecin outside of the United States. In connection with these agreements,Abbott made a $26.5 million equity investment in January 2000 and a$2.5 million equity milestone payment in July 2001.

On March 4, 2002, SuperGen and Abbott mutuallyterminated the Common Stock and Option Purchase Agreement and the WorldwideSales, Distribution and Development Agreement. We regained all marketing rightsto Orathecin worldwide. In connection with this termination agreement, weagreed to reimburse Abbott for development work they completed on our behalfand paid Abbott $880,000 in March 2002 and $370,000 in 2003.

In December 1999, we also entered into a Nipent distribution agreement with Abbott, whichis still in effect. Beginning March 1, 2000, Abbott became the exclusiveU.S. distributor of Nipent for a period of five years. We retain U.S. marketingrights for Nipent. Under this agreement, Abbott made a $5 million cash paymentto the Company in January 2000. This amount is included in deferredrevenue and was recognized as other revenue through December 2002.

In March 2003, we entered into an agreement withAbbott that allows us to terminate the Nipent distribution agreement, for astated fee that decreases over time to $1.5 million at March 2005. As partof the agreement, we paid Abbott $500,000 for the right to terminate the Nipentdistribution agreement at our option. The $500,000 has been recorded as areduction of the deferred revenue we initially received 

F-21

----

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

**8.Termination of Agreements with Abbott Laboratories (Continued)**

from Abbott for thedistribution rights, and we stopped amortizing the remaining deferred revenue,which was $1,667,000 at December 31, 2003, to account for the terminationfee we may pay to Abbott.

Theunamortized balance of $1,667,000 is included in current deferred revenue at December 31,2004 and non-current deferred revenue at December 31, 2003. In February2005, we paid Abbott $1,500,000 to terminate the Nipent distribution agreement.

**9. Related PartyTransactions**

**EuroGenPharmaceuticals Ltd.**

In September 2001, weentered into a Supply and Distribution Agreement with EuroGen PharmaceuticalsLtd., a company incorporated and registered in England and Wales. Under theagreement, we granted EuroGen the exclusive European and South African rightsto promote and sell certain of our existing generic and other products orcompounds. The agreement also establishes a process for granting EuroGen rightsto sell additional products in Europe and South Africa, subject to ourcompliance with our other existing licensing and distribution arrangements. Aftercomplying with these existing obligations, we will be required to offer EuroGenthe option to obtain European and South African rights to our future products. EuroGenwill seek and pay for all necessary regulatory approvals and authorizationsnecessary for the commercial sale of the products in the territories where theymarket and sell the products. During 2001 we had loaned EuroGen $260,000 undera line of credit arrangement designed to cover start-up expenses. During 2002,we advanced an additional $646,000 to EuroGen to fund its operations. In December 2002,all but one of the other investors in EuroGen withdrew their ownershipinterests in the entity, and we became 95% owners of EuroGen. The remaining 5%is owned by Larry Johnson, the President and CEO of EuroGen. The amountsadvanced to EuroGen, including the amounts advanced in 2001, totaling $906,000were charged to Selling, general, and administrative expense in 2002. In 2003and 2004, the results of EuroGen are included in our consolidated operations inSelling, general and administrative expenses. During the years ended December 31,2004 and 2003, we have recorded expenses of $2,269,000 and $325,000,respectively, related to the EuroGen.

**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. In March 2003,we made an additional equity investment of $30,000 to acquire an additional15,000 shares. The president and chief executive officer of KineMed is a formerdirector of SuperGen. Our current president and chief executive officer is amember of the board of directors of KineMed. We have accounted for thisinvestment under the cost method as our ownership is less than 20% of KineMed’soutstanding shares. This investment is included on the balance sheet inInvestment in stock of related parties.

In late 2004, we reached an agreement with KineMedwhereby we granted them exclusive worldwide rights to the development,manufacture, commercialization and distribution of proprietary property we ownrelating to etiocholoandeione and etiocholanolone compounds. Under the terms ofthe license agreement and upon successful commercialization, we could earnfuture royalty revenue on worldwide sales. In addition, we have terminationrights and rights of first refusal on new oncological uses.

F-22

----

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

**9. Related PartyTransactions (Continued)**

**AVI BioPharma, 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 of Directors. He later resigned from our Board in May 2002.The former president and chief executive officer of SuperGen was a member ofthe Board of Directors of AVI through March 2004. Under the terms of theagreement, we acquired one million shares of AVI common stock, which amountedto approximately 7.5% of AVI’s outstanding common stock, for $2.5 million cashand 100,000 shares of our common stock at $28.25 per share. We also acquiredexclusive negotiating rights for the United States market for Avicine, AVI’sproprietary cancer vaccine currently in late-stage clinical testing against avariety of solid tumors. Avicine is anon-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 sharesand is classified as available-for-sale. No value has been ascribed to theoption as neither of the measurements have been achieved as of December 31,2004.

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. At December 31,2004, the sum of these expenses, or $565,000, was still payable and ispresented on the balance sheet as Payable to AVI BioPharma, Inc.

**Quark Biotech, Inc.**

Our current president/chief executive officer and ourformer president/chief executive officer are directors and stockholders ofQuark Biotech, Inc. (“QBI”), a privately-held development stagebiotechnology company. In June 1997, we made an equity investment of$500,000 in QBI’s preferred stock, which represents less than 1% of the company’soutstanding shares as of December 31, 2001. Our investment in QBI iscarried at cost and is included in “Investment in stock of related parties.”

In January 2002, wesubleased a portion of our laboratory space to QBI. During 2003 and 2002, wecollected $56,000 and $123,000, respectively, in sublease income from QBI. Theinitial term of the sublease expired on December 31, 2002, but wecontinued to sublease the space to QBI on a month-to-month basis until August 2003.

F-23

----

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

**9. RelatedParty Transactions (Continued)**

**The Kriegsman Group**

In March 2001, weretained The Kriegsman Group to render advice and assistance with respect tofinancial public relations and promotions. On July 25, 2002, our formerpresident/chief executive officer and board member through 2004 became a memberof the board of directors of CytRx Corp. Steven Kriegsman, the president of TheKriegsman Group, is also a significant shareholder and president and chiefexecutive officer of CytRx Corp. See Note 3and 6 for discussion of cash and warrants granted to the Kriegsman Group andthe accounting treatment of each transaction. We also paid The KriegsmanGroup consulting fees of $220,000 in 2003 and $240,000 in 2002. No otherconsulting fees were paid to Kriegsman in 2004.

**Other**

At December 31, 2004, 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, $371,000 in 2003, and $360,000 in 2002 forservices and supplies. We carry ourinvestment in this company at no value.

At December 31, 2004and 2003, we have $93,000 and $437,000, respectively, in receivables due fromrelated parties. The receivables consist of advances or loans to employees. $250,000of the balance at December 31, 2003 related to a loan to an officer thatwas due on December 31, 2003 under its original terms. The loan was repaidin 2004.

**10. 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 $3.2 million in certificates ofdeposit. The certificates of deposit are included in the balance sheet underRestricted cash and investments. Upon achievement of certain milestones and thepassage of time, the amounts of the letters of credit are subject to reductionor elimination.

We are also leasing additional office space in abuilding adjacent to our laboratory facility under two leases which both terminatein June 2006. Half of the space has been subleased under a non-cancellablelease terminating at the same time as our master lease. The other half of thespace has been subleased through June 2005 with an option through June 2006.

F-24

----

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

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

Future minimum rentals andsublease income under all operating leases with terms greater than one year areas follows (in thousands):
| ** **                                  | ** ** | **Minimum  rental  obligations** | ** ** | **Sublease  income** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|----------------------|------------|
| **Year ending December 31,** |       |                             |       |                 |       |   |   |   |   |
| 2005                                        |       |                             | $          | 2,363                |       |   |   | $ | 249 |   |   |
| 2006                                        |       |                             | 2,281      |                 |       |   | 91 |   |   |
| 2007                                        |       |                             | 2,213      |                 |       |   | — |   |   |
| 2008                                        |       |                             | 2,297      |                 |       |   | — |   |   |
| 2009 and  thereafter                        |       |                             | 4,513      |                 |       |   | — |   |   |
|                                        |       |                             | $          | 13,667               |       |   |   | $ | 340 |   |   |

 

Rent expense was $2,034,000 in 2004, $1,985,000 in2003, and $1,948,000 in 2002. These amounts were net of sublease income of$323,000 in 2004, $393,000 in 2003, and $450,000 in 2002.

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 of December 31,2004.

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, 2004.

**11. Income Taxes**

Forfinancial reporting purposes, our net loss included the following components:
| ** **    | ** ** | **Year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net Loss:     |       |                                       |       |   |   |   |   |
| United States |       | $                                          | (44,270    | ) | $ | (52,922 | ) | $ | (48,380 | ) |
| Foreign       |       | (2,590                                     | )          | (548 | ) | (1,091 | ) |
|          |       | $                                          | (46,860    | ) | $ | (53,470 | ) | $ | (49,471 | ) |

 

F-25

----

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

**11.Income Taxes (Continued)**

Deferred income taxesreflect the net tax effects of temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes. Significant components of our deferred tax assets areas follows (in thousands):
| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Deferred Tax  Assets:                         |       |                  |       |   |   |
| Net operating loss carryforwards              |       | $                     | 107,237    |   | $ | 97,030 |   |
| Purchased in-process technology               |       | 6,477                 |       | 3,415 |   |
| Research and development credit carryforwards |       | 8,899                 |       | 7,971 |   |
| Capitalized research and development          |       | 7,395                 |       | 6,683 |   |
| Other                                         |       | 8,054                 |       | 4,919 |   |
|                                          |       | 138,062               |       | 120,018 |   |
| Valuation allowance                           |       | (138,062              | )          | (114,862 | ) |
| Deferred tax assets.                          |       | $                     | —     |   | $ | 5,156 |   |
| Deferred Tax Liabilities:                     |       |                  |       |   |   |
| Amortization of Debt Discount                 |       | —                |       | 5,156 |   |
| Deferred tax liabilities                      |       | $                     | —     |   | $ | 5,156 |   |
| Net Deferred Tax  Assets                      |       | $                     | —     |   | $ | — |   |

 

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 valuation allowance. Thevaluation allowance increased by $23,200,000 during 2004, $17,015,000 during2003, and by $14,668,000 during 2002.

As of December 31, 2004 we have net operatingloss carryforwards for federal income tax purposes of approximately$295,015,000 which expire in the years 2005 through 2024, and federal researchand development credit carryforwards of approximately $5,532,000, which expirein the years 2008 through 2024.

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.

**12. Employee Benefit Plans**

We have adopted a 401(k) Profit Sharing Plan (the“401(k) Plan”) for all eligible employees with a minimum of two months ofservice. We may be obligated to make contributions to the plan to comply withstatutory requirements. Voluntary employee contributions to the 401(k) Planmay be matched 50% by the Company, up to 3% of each participant’s annualcompensation. Our expense relating to contributions made to employee accountsunder the 401(k) Plan was approximately $222,000 in 2004, $300,000 in2003, and $297,000 in 2002.

In 1998 we established the 1998 Employee StockPurchase Plan (“ESPP”), and a total of 300,000 shares of Common Stock arereserved for issuance under the plan. Employees participating in the ESPP 

F-26

----

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

**12.Employee Benefit Plans (Continued)**

are granted the right topurchase shares of common stock at a price per share that is the lower of 85%of the fair market value of a share of Common Stock on the first day of anoffering period, or 85% of the fair market value of a share of Common Stock onthe last day of that offering period.

In 2004, we issued 31,685and 29,372 shares through the ESPP at $6.15 and $5.00, respectively. In 2003,we issued 37,065 and 45,746 shares through the ESPP at $3.59 and $3.82,respectively. In 2002, we issued 44,097 and 33,606 shares through the ESPP at$4.46 and $3.48, respectively. As of December 31, 2004, 178,813 shares arereserved for future issuance under the ESPP.

**13. Quarterly FinancialData (Unaudited)**

Followingis a summary of the quarterly results of operations for the years ended December 31,2004 and 2003:
| ** **                              | ** ** | **Quarter Ended**                                                          | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **March 31**                                                               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                              | ** ** | **(Amounts in thousands, except per share data)** | ** ** |
| **2004**                                |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                               |       | $                                                                               | 1,098      |   | $ | 2,636 |   |   | $ | 3,909 |   |   |   | $ | 5,484 |   |   |
| Cost of sales                           |       | 551                                                                             |       | 1,196 |   |   | 1,168 |   |   |   | 1,221 |   |   |
| Net income (loss)                       |       | (18,735                                                                         | )          | (21,312 | ) |   | (12,356 | ) |   |   | 5,543 |   |   |
| Basic net income  (loss) per share |       | (0.48                                                                           | )          | (0.48 | ) |   | (0.27 | ) |   |   | 0.11 |   |   |
| Diluted net  income (loss) per share    |       | (0.48                                                                           | )          | (0.48 | ) |   | (0.27 | ) |   |   | 0.11 |   |   |
| **2003**                                |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                               |       | $                                                                               | 2,176      |   | $ | 4,096 |   |   | $ | 4,419 |   |   |   | $ | 746 |   |   |
| Cost of sales                           |       | 754                                                                             |       | 1,585 |   |   | 1,023 |   |   |   | 504 |   |   |
| Net loss                                |       | (11,666                                                                         | )          | (12,468 | ) |   | (10,503 | ) |   |   | (18,834 | ) |   |
| Basic and diluted net  loss per share   |       | (0.35                                                                           | )          | (0.38 | ) |   | (0.30 | ) |   |   | (0.52 | ) |   |

 

F-27

----

 

**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 2005.
|          | 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       |       | March 16,  2005 |
| (James S.J.  Manuso)   |          | Director (Principal Executive Officer)        |       |                 |
| /s/  MICHAEL MOLKENTIN |          | Chief Financial Officer  (Principal Financial |       | March 16,  2005 |
| (Michael  Molkentin)   |          | and Accounting Officer)                       |       |                 |
| /s/  CHARLES CASAMENTO |          | Director                                      |       | March 16,  2005 |
| (Charles  Casamento)   |          |                                          |       |                 |
| /s/  THOMAS V. GIRARDI |          | Director                                      |       | March 16,  2005 |
| (Thomas V.  Girardi)   |          |                                          |       |                 |
|                   |          | Director                                      |       | March 16,  2005 |
| (Allan R. Goldberg)    |          |                                          |       |                 |
| /s/  WALTER J. LACK    |          | Director                                      |       | March 16,  2005 |
| (Walter J. Lack)       |          |                                          |       |                 |
| /s/  MICHAEL YOUNG     |          | Director                                      |       | March 16,  2005 |
| (Michael  Young)       |          |                                          |       |                 |

 

S-1

----