**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

| **x**  | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------|---------------------------------------------------------------------------------------------------------|
|   | **For the  Fiscal Year Ended December 31, 2005**                                                   |
|   | **OR**                                                                                                  |
| **o**  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from _________ to _________**

**Commission file number 0-27628**

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**SUPERGEN, INC.**

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

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

 

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

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**Securities registered pursuant to Section 12(b) ofthe Act:**  None

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

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

(Title of Class)

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (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 No o

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

| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o No x

The aggregate market value of the voting stock held bynon-affiliates of the Registrant (based on the closing sale price of the CommonStock as reported on the Nasdaq Stock Market on June 30, 2005, the lastbusiness day of the Registrant’s most recently completed second fiscal quarter)was approximately $250,638,572. This determination of affiliate status is notnecessarily a conclusive determination for other purposes. The number ofoutstanding shares of the Registrant’s Common Stock as of the close of businesson March 8, 2006 was 51,755,544.

**DOCUMENTS INCORPORATED BYREFERENCE**

Items 10, 11, 12, 13 and 14of Part III incorporate by reference information from the definitive proxystatement for the Registrant’s Annual Meeting of Stockholders to be held on June 9,2006.

 

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**SUPERGEN,INC.2005 ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS**

 
|               | ** ** | ** **                                                                                                                      | ** ** | **Page** | ** ** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       |                                                                                                                            |       |     |       |   |   |
| Item 1.       |       | Business                                                                                                                        |       |     | 1          |   |   |
| Item 1A.      |       | Risk  Factors                                                                                                                   |       |     | 28         |   |   |
| Item 1B.      |       | Unresolved Staff Comments                                                                                                       |       |     | 44         |   |   |
| Item 2.       |       | Properties                                                                                                                      |       |     | 44         |   |   |
| Item  3.      |       | Legal  Proceedings                                                                                                              |       |     | 44         |   |   |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                                             |       |     | 44         |   |   |
| PART II  |       |                                                                                                                            |       |     |       |   |   |
| Item 5.       |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities              |       |     | 45         |   |   |
| Item 6.       |       | Selected Financial Data                                                                                                         |       |     | 46         |   |   |
| Item 7.       |       | Management’s Discussion and Analysis of Financial Condition  and Results of Operations       |       |     | 47         |   |   |
| Item 7A.      |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                     |       |     | 60         |   |   |
| 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         |   |   |
| Item  9B.     |       | Other  Information                                                                                                              |       |     | 63         |   |   |
| PART III |       |                                                                                                                            |       |     |       |   |   |
| Item 10.      |       | Directors and Executive Officers of the Registrant                                                                              |       |     | 63         |   |   |
| Item 11.      |       | Executive Compensation                                                                                                          |       |     | 64         |   |   |
| Item 12.      |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                                 |       |     | 65         |   |   |
| Item 13.      |       | Certain Relationships and Related Transactions                                                                                  |       |     | 65         |   |   |
| Item 14.      |       | Principal  Accounting Fees and Services                                                                                         |       |     | 65         |   |   |
| PART IV  |       |                                                                                                                            |       |     |       |   |   |
| Item 15.      |       | Exhibits,  Financial Statement Schedules                                                                                        |       |     | 66         |   |   |
| SIGNATURES    |       |                                                                                                                            | S-1        |     |       |

 

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**Special Note Regarding 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;our estimates about becoming profitable; our forecasts regarding our researchand development expenses; our expectation that EuroGen will generate revenueduring 2006; the failure of the Montigen stockholders to approve the proposedacquisition transaction, satisfy other conditions to closing or obtain statesecurities regulatory approval, and the inability to successfully integrateMontigen and its technology and research team; and our statements regarding thesufficiency of our cash to meet our operating needs. Our actual results coulddiffer materially from those predicted in the forward-looking statementsas a result of risks and uncertainties including, but not limited to, delaysand risks associated with conducting and managing our clinical trials;developing products and obtaining regulatory approval; ability to establish andmaintain collaboration relationships; competition; ability to obtain funding;ability to protect our intellectual property; our dependence on third partysuppliers; risks associated with the hiring and loss of key personnel; adversechanges in the specific markets for our products; and ability to launch andcommercialize our products. 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.*

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

**PART I**

**ITEM 1. BUSINESS.**

We incorporated in March 1991as a California corporation and changed our state of incorporation to Delawarein May 1997. Our executive offices are located at 4140 Dublin Blvd., Suite 200,Dublin, CA, 94568 and our telephone number at that address is (925) 560-0100.We maintain a website on the internet atwww.supergen.com.

**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 andNipent® (pentostatin for injection).

On December 31, 2004, our New Drug Application (“NDA”)submission for Dacogen was accepted for filing by the Food and DrugAdministration (“FDA”) and indicated a target Prescription Drug User Fee Act (“PDUFA”)date of September 1, 2005. On September 1, 2005, we received anApprovable Letter for Dacogen from the FDA, which provided that Dacogen wasapprovable pending the FDA’s review of a requested analysis of transfusion datafrom patients enrolled in the pivotal Phase III trial as well as certainnon-clinical information and completion of labeling discussions. We completedthe requested analyses and 

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submitted our response tothe Approvable Letter on November 15, 2005. On December 15, 2005, theFDA accepted our resubmission as a complete response, which they classified asa Class 2 response, and established a user fee goal (action letter) of May 15,2006.

Our European subsidiary, EuroGen Pharmaceuticals Ltd.(“EuroGen”), submitted a Marketing Authorization Application (“MAA”) forDacogen to the European Medicines Agency (“EMEA”), which was accepted forreview on October 25, 2004. Following an oral hearing, together with MGIPHARMA (“MGI”) we determined that additional clinical data will be required tocontinue the approval process for Dacogen in Europe. Therefore, we withdrew theMAA for Dacogen in November 2005. This revision in the European regulatorystrategy for Dacogen does not affect the regulatory strategy being pursued inthe United States.

During September 2004, weexecuted a definitive agreement granting MGI exclusive worldwide rights to thedevelopment, manufacture, commercialization and distribution of Dacogen. Underthe terms of the agreement, MGI made a $40.0 million equity investment in usand will pay up to $45.0 million in specific regulatory and commercializationmilestones. To date, we have received $12.5 million of these 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 on their own at a minimum of$15.0 million over a three year period.

In January 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 response date in November 2004.At the request of the FDA, during November 2004 we submitted additionalclinical data from a trial of Orathecin as a first-line treatment forpancreatic cancer as well as new analyses of data from the pivotal study insecond and third line patients. The FDA classified these data as a MajorAmendment, which triggered an extension of the review period by 90 days,resulting in a revised target response date in February 2005. Based onfurther discussions and feedback with both the FDA and consultants, wedetermined the current package for Orathecin was not sufficient to gainapproval at this time in the United States and we withdrew the NDA in January 2005.

In July 2004, we submitted a MAA to the EMEAseeking approval of Orathecin. Based on extensive discussions with the EMEA, wewithdrew the MAA in January 2006. We currently have an ongoing Phase IIclinical trial of Orathecin in combination with gemcitabine in first-linepatients with  advanced pancreatic cancer.Our future registration strategy for Orathecin in the US and Europe isdependent on the results of this ongoing U.S. trial. Interim results for thisclinical trial are expected during the first half of 2006.

Nipent is approved in theU.S. and several European countries for the treatment of hairy cell leukemiaand is marketed by us in the United States and Europe. The Europeandistribution is currently handled by Wyeth Pharmaceuticals (“Wyeth”) under adistribution agreement. We have completed several Phase IV, or post-marketingtrials, and we continue to support trials intended to explore Nipent’spotential use in indications such as chronic lymphocytic leukemia (“CLL”),non-Hodgkin’s lymphoma (“NHL”), and graft-versus-host disease (“GvHD”).We have commercialization rights for Nipent, which we market directly in theUnited States through our sales force and either directly or indirectly ininternational markets.

**Strategy**

We are a pharmaceutical company dedicated to thedevelopment and commercialization of therapies for solid tumors, hematologicalmalignancies, and blood disorders. Our strategy is to commercialize products byexecuting alternative development and commercialization strategies thatminimize the time, expense and technical risk associated with drug researchthrough identifying and acquiring pharmaceutical 

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compounds. Compounds canbe obtained through internal development, licensure or acquisition thattypically will show initial efficacy in humans or in a model relevant to aparticular disease at the pre-clinical or early clinical stages of development.Our primary objective is to become a leading supplier of therapies for solidtumors, hematological malignancies, and blood disorders. Key elements of ourstrategy include:

*Expandingcommercialization of our current products and launching each new product whenapproved by the FDA or other regulatory 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 our commercializationefforts, 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 such as Nipent; 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 anynew approved products.

*Expandingour sales and market penetration of the therapeutic anti-cancer market.**  *We have endeavored to establish a leadership positionin the market of hematological products. This market exists within the overallanti-cancer market. We believe we are prudently expanding our sales andmarketing organization in the hematology space and expanding our brand intosolid tumors to support commercialization of our existing and any new products.This expansion primarily entails increasing the number of direct salesrepresentatives we employ to call on oncologists and hematologists. The expansionalso entails additional investment in marketing and branding initiatives toextend our name recognition further into the therapeutic anti-cancermarket.

*Globalizingour 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 continuedexpansion of our subsidiary, EuroGen, is an on-going step in this strategy,intended to ultimately create a meaningful presence for our products in fivemajor countries of the European Union (“EU”). EuroGen is primarily aregistration, sales and marketing organization. Previously, EuroGen has filedregistration documentation to sell mitomycin and paclitaxel. During 2004,EuroGen filed registration documentation for Orathecin and Dacogen andtransferred the Nipent MAA from Pfizer to EuroGen. EuroGen is not expected topenetrate all European markets in the near future. The markets for anti-cancerproducts in the United Kingdom, Germany, France, Italy and Spain representapproximately 80 percent of the current anti-cancer market in WesternEurope. We now expect EuroGen to generate revenue during 2006 from sales ofNipent. We intend to penetrate other areas outside of the United States throughpartners and distributors.

*Capitalizingon our existing clinical expertise and regulatory development to maximize thecommercial 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 

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areas beyond our products’approved indications. This expansion entails managing numerous additionalclinical studies and regulatory interactions for our key products. This processis complex whether it is conducted through our Clinical department for formallabel expansion or whether the trials are supported and managed through ourMedical Affairs department. Over 20 physicians have initiated clinical studieswith Nipent that are currently being managed by our Medical Affairs departmentfor a wide range of diseases. We believe companies are open to working with usbecause of our corporate expertise with the developmental, regulatory andmarketing aspects of maximizing the value of products in this market segment. Webelieve our clinical development experience serves to increase the value of ourproduct portfolio.

*Acquiring, licensing orco-developing compounds or product technologies.**  *We identify and seek to acquire, license orco-develop products or compounds that are in various stages of development oralready marketed. We then seek to enhance and complete product development andcommercialization. Historically, our approach resulted in minimizing thefinancial investment required and reduced the risk of failure in developing acommercially viable product. Dacogen, Orathecin and Nipent were each acquiredthrough this process. We believe our ability to navigate products throughclinical development, the FDA and other regulatory agencies makes us a moreattractive partner for companies seeking to sell or license products orcompounds.

**Summaryof Products and 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.

*MyelodysplasticSyndrome*

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

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 theAmerican Society for Hematology meeting in December 2004, we reportedresults from our randomized Phase III study of Dacogen for injection as atreatment for MDS. The study enrolled 170 patients at 22 North American sites,with 89 randomized to Dacogen plus supportive care and 81 randomized tosupportive care only. Supportive care included antibiotics, growth factorsand/or transfusions. The presentation included results from both primaryendpoints of the study, response rate (CR + PR) per IWG MDS criteria as well astime to AML transformation or death.

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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 Dacogentreatment were seen in all IPSS groups enrolled in the study. The medianduration or response was 266 days. Dacogen responders versus all non-respondershad a median of 491 versus 274 AML-free days until death, a median of 657versus 384 days of survival and remained or became RBC/platelet transfusionindependent during response.  Median timeto AML transformation or death in all patients was 340 days for the Dacogen armversus 219 days for the best supportive care arm (p= 0.043 Wilcoxon, 0.160Log-rank).  All analyses were specified by the protocol. We and ourclinical advisors believe that these data are clinically significant and thesedata were used to form the basis of our NDA and MAA for Dacogen.

More adverse events were reported for patients randomizedto the Dacogen arm. Leucopenia and febrile neutropenia were observed morefrequently in patients given Dacogen, as were nausea, constipation, diarrhea,vomiting, pneumonia, arthralgia, headache and insomnia. Severe adverse eventsobserved more frequently in patients randomized to Dacogen, categorized asGrade 3 or 4, were leucopenia and febrile neutropenia. The rates of Grade 3-4sepsis were similar (8% in the Dacogen arm versus 6% in the supportive careonly arm). The mortality rate for patients on study is 12% for Dacogen and 9%for supportive care. This difference in mortality rates was not statisticallysignificant.

Dacogen received orphan drug designation in the UnitedStates and Europe, which may provide us with seven years of marketing exclusivityin the United States and ten years marketing exclusivity in Europe, if Dacogenis approved by regulatory authorities for MDS. In addition, the FDA has grantedus “fast track” designation for Dacogen. However, the FDA approval process maytake a significant amount of time and Dacogen may not be approved.

On December 31, 2004, our NDA submission forDacogen was accepted for filing by the FDA and indicated a target PDUFA date ofSeptember 1, 2005. On September 1, 2005, we received an ApprovableLetter for Dacogen from the FDA, which provided that Dacogen was approvablepending the FDA’s review of a requested analysis of the transfusionrequirements of patients enrolled in the completed Phase III trial, submissionof certain other information, and completion of labeling discussions. Wecompleted the collection and analysis of the data requested by the FDA andsubmitted our response to the Approvable Letter on November 15, 2005. On December 15,2005, the FDA accepted our resubmission as a complete response to theApprovable Letter. The resubmission has been classified by the FDA as a Class 2response, and the FDA established a user fee goal date to review the responseby May 15, 2006.   There can be no guarantee that the FDA willapprove Dacogen.

Our European subsidiary, EuroGen, submitted an MAA forDacogen to the EMEA, which was accepted for review on October 25, 2004. We,along with MGI, determined that additional clinical data will be required tocontinue the review of Dacogen in Europe. Therefore, we withdrew the MAA forDacogen in November 2005. This revision in the European regulatorystrategy for Dacogen does not affect regulatory strategies being pursued in theUnited States.

We continue to work with MGI and European regulatoryauthorities to determine the information required to support a resubmission ofthe application, and anticipate resubmitting the application at a later date. MGIanticipates that next steps in the European regulatory strategy may be finalizedin collaboration with a partner.

During September 2004, we executed a definitiveagreement granting MGI exclusive worldwide rights to the development,manufacture, commercialization and distribution of Dacogen. Under the terms ofthe agreement, MGI made a $40.0 million equity investment in us and will pay upto $45.0 million in specific regulatory and commercialization milestones. Todate, we have received $12.5 million of these milestones. If Dacogen isapproved, we could receive a royalty on worldwide net sales starting at 20% andescalating to a maximum of 30%. MGI has also committed to fund furtherdevelopment costs associated with Dacogen on their own at a minimum of $15.0million over a three year period.

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***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 providepatients with an improved quality of life. We believe that Orathecin is a keydrug that may be used in the treatment of a broad array of solid tumors andhematological malignancies. Orathecin has been tested in 46 clinical trials in17 tumor types and 7 hematologic malignancies in over 2,800 patients. Orathecinreceived orphan drug designation for pancreatic cancer in both the UnitedStates and Europe, which may provide us with seven years of marketingexclusivity in the United States and ten years of marketing exclusivity inEurope, if Orathecin is approved by regulatory authorities for this disease.Similar marketing exclusivity is available in Japan.

In January 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 response date in November 2004.At the request of the FDA, during November 2004 we submitted additionalclinical data from a trial of Orathecin as a first-line treatment forpancreatic cancer as well as new analyses of data from the pivotal study insecond and third line patients. The FDA classified these data as a MajorAmendment, which triggered an extension of the review period by 90 days,resulting in a revised target response date in February 2005. Based onfurther discussions and feedback with both the FDA and consultants helping usdialog with the FDA, we determined the current package for Orathecin was notsufficient to gain approval at this time in the United States and we withdrewthe NDA in January 2005.

We currently have an ongoing Phase II clinical trialto study Orathecin and gemcitabine as a first-line combination therapy for advancedpancreatic cancer patients who have not undergone chemotherapy. We willconsider future development alternatives for Orathecin partially based on areview of the interim results of the clinical trial, which we expect to occurduring the first half of 2006.

In July 2004, wesubmitted a MAA to the EMEA seeking approval of Orathecin. Based on extensivediscussions with the EMEA, we withdrew the MAA in January 2006. Our futureregistration strategy in Europe is dependent on the results of the ongoing U.S.Phase II clinical trial to study Orathecin and gemcitabine as a first-linecombination therapy for advanced pancreatic cancer patients who have notundergone chemotherapy.

*Pancreatic Cancer*

Pancreatic cancer causes more than 75,000 deaths peryear globally. Based on a 1988-1992 study by the National CancerInstitute (“NCI”) pancreatic cancer accounts for only 2% of all newly diagnosedcancers in the United States each year, but results in 5% of all cancer deaths.The most commonly used therapies to treat pancreatic cancer include 5-FUand gemcitabine.

In our large Phase IIIpancreatic cancer trial in the third-line setting, patients who had failedprior chemotherapy were randomized to either Orathecin or best supportive care(the standard of care in this setting). In this study Orathecin-treatedpatients showed an improvement in time to disease progression and in survival,however, the differences were not substantial and did not achieve statisticalsignificance. 

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Thisevidence of clinical activity has led us to conduct the current Phase II studyof Orathecin in combination with gemcitabine as first-line therapy in chemonaive advanced pancreatic cancer patients. Interim results for this clinicaltrial are expected to occur during the first half of 2006.

***Nipent***

Nipent inhibits a keyenzyme in the DNA synthesis process and results in cytotoxicity, primarily inlymphocytes, with little other known effect on normal tissue. We acquiredNipent from the Parke-Davis division of the Warner-Lambert Company(Pfizer) in 1996 and the remaining European rights in February 2004. Wyethis the current distributor outside of the United States. We believe that Nipent’smost unique feature is its selectivity for lymphocytes, which has created aninterest in this product for the treatment of cancers of the lymphoid systemand other hematologic malignancies. Nipent has been our principal source ofrevenue since 2000.

*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. We are currentlynegotiating with Wyeth for the acquisition of their distribution rights forNipent outside the United States. We expect to complete the negotiations withinthe first half of 2006. If we are successful with our negotiations, ourEuropean subsidiary will be positioned to re-launch Nipent in several major EUmarkets. Warner-Lambert had initially retained a worldwide, royalty-freelicense to sell Nipent, but sold 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 in autoimmuneconditions and Phase II trials in GvHD, and developing an oral formulation ofNipent, which may be suitable for more chronic administration.

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***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        Products |       | Mitomycin  Paclitaxel     |       | Solid tumors  Solid tumors                    |       | Cancer  Cancer |       | Marketed  Approved              |
| Non-Pharmaceutical  Product                             |       | Surface Safe®        |       | Surface Decontaminate                         |       |           |       | Marketed                        |
| Formulation Products                                    |       | Mitozytrex                |       | Solid tumors                                  |       | Cancer         |       | Approved                        |
|                                                    |       | Partaject busulfan        |       | Neoplastic meningitis/ bone marrow transplant |       | Cancer         |       | Phase I/II                      |
|                                                    |       | Partaject Orathecin       |       | Solid tumors                                  |       | Cancer         |       | Pre-clinical                    |
|                                                    |       | CZ 112                    |       | Solid tumors                                  |       | Cancer         |       | Phase I                         |
|                                                    |       | Cremophor-free paclitaxel |       | Solid tumors                                  |       | Cancer         |       | Pre-clinical                    |
| Product Candidates                                      |       | Avicine                   |       | Therapeutic Vaccine                           |       | Cancer         |       | Phase II                        |
|                                                    |       | VEGF                      |       | Anti-angiogenesis                             |       | Cancer         |       | Pre-clinical                    |

 

***GenericAnti-Cancer Products***

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. Wealso believe sales for these generics may continue to decrease as a result ofcompetitive factors. These factors may include reductions in the per unit salesprice, introduction of additional generics as well as other cancer drugs, newformulations for these drugs and the use of different therapies. Therefore, wecurrently intend to limit our development of generic products to those thateither require minimal effort to submit an abbreviated new drug application (“ANDA”)and obtain marketing clearance, or that offer significant market opportunities.

*Mitomycin.**  *We received approval of an ANDA for our genericmitomycin in 1998 for the treatment of disseminated adenocarcinoma of thestomach or pancreas in proven combinations with other approved chemotherapeuticagents and as palliative treatment when other modalities have failed. We arecurrently selling mitomycin in the United States and we are also a contractsupplier for another distributor in the United States.

*Daunorubicin.**  *We received approval of an ANDA for genericdaunorubicin for a variety of acute leukemias in 2001. During 2005, we sold andtransferred to American Pharmaceutical Partners, Inc. for net proceedstotaling $590,000 the ANDA and all rights, title and interest in our genericdaunorubicin.

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

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*Non-PharmaceuticalProduct*

*Surface Safe.**  *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 first product utilizing our formulationtechnology, Mitozytrex, which is a formulation of generic mitomycin, wasapproved by the FDA in November 2002 for use in the therapy ofdisseminated adenocarcinoma of the stomach or pancreas in proven combinationswith other approved chemotherapeutic agents and as palliative treatment whenother modalities have failed. We cannot promote Mitozytrex as providing anyinjection site ulceration protection, nor can we promote any commerciallyviable increased stability, solubility or shelf life extension, as compared togeneric mitomycin. We must develop and submit additional data to the FDA in NDAsupplements and receive FDA approval for additional claims. We are currentlyexploring marketing opportunities and/or marketing partners for Mitozytrex.

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

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

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

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

*Product Candidates*

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

*VEGF (Anti-Angiogenesis).**  *In February 2001, we licensed from PeregrinePharmaceuticals (formerly known as Techniclone Corp.) a platform drug-targetingtechnology known as Vascular Targeting Agent (“VTA”). The licensed technologyis related to Vascular Endothelial Growth Factor (“VEGF”). The VTA technologyis a proprietary platform designed to specifically target a tumor’s bloodsupply and subsequently destroy the tumor with various attached therapeuticagents. We are currently in the process of exploring marketing opportunitiesand/or marketing partners for this product.

**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-Oncology Proprietary 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.

**Acquisitionof New Products and Technologies**

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

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OnJanuary 27, 2006, we announced that we have entered into adefinitive agreement to acquire Montigen Pharmaceuticals, Inc. (“Montigen”),a privately-held oncology-focused drug discovery and development companyheadquartered in Salt Lake City, Utah. Montigen’s assets include its researchand development team, a proprietary drug discovery technology platform andoptimization process, CLIMBTM, and late-stage pre-clinical compounds targetingaurora-A kinase and members of the tyrosine kinase receptor family. One of theMontigen compounds is expected to be the subject of a pre-IND meeting with theFDA later this year. Pursuant to the terms of the agreement, we will pay theMontigen stockholders a total of $18.0 million upon the closing of thetransaction, consisting of $9.0 million in cash and $9.0 million in shares ofSuperGen common stock. We will pay the Montigen stockholders an additional$22.0 million in shares of SuperGen common stock, contingent upon achievementof specific regulatory milestones. Completion of the acquisition will besubject to approval by the Montigen stockholders, customary closing conditions,and the issuance of a permit from the Commissioner of Corporations for theState of California so that the issuance of the shares of SuperGen common stockwill be exempt from registration under the Securities Act of 1933. The proposedtransaction is expected to close in late March 2006. The potentialacquisition of Montigen will strengthen our pre-clinical development effortswhile we continue to focus on later-stage opportunities as well.

**Research and Development**

Because of the stage ofour development and the nature of our business, we expend significant resourceson research and development activities. We expended $15.1 million in 2005,$24.0 million in 2004, and $26.3 million in 2003 on research and development. Weconduct research internally and also through collaborations with third parties,and we intend to maintain our strong commitment to our research and developmentefforts in the future. Our major research and development projects haveincluded Dacogen, Orathecin, and studies on additional uses for Nipent.

*Dacogen*

From 1999 through 2005, we spent approximately$12.7 million on the pre-clinical and clinical development of Dacogen. Dacogenis an investigational anti-cancer therapeutic for the treatment of patientswith MDS. We submitted an NDA for Dacogen to the FDA in November 2004. Wereceived an approvable letter from the FDA in September 2005, andsubmitted additional data requested by the FDA in November 2005.  A response is expected from the FDA in May 2006.In October 2004, we submitted a MAA forDacogen to the EMEA, but the submission was withdrawn in November 2005.

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

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*Orathecin*

From 1998 through 2005 we have spent approximately$71.5 million on the Orathecin program. In January 2004 we submittedan NDA under accelerated approval procedures to the FDA for Orathecin for thetreatment of pancreatic cancer patients that have failed one or more therapies.The filing was accepted by the FDA and indicated a target response date inNovember 2004. At the request of the FDA, during November 2004 wesubmitted 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 second and third line patients. The FDA classified these dataas a Major Amendment, which triggered an extension of the review period by 90days, resulting in a revised target response date in February 2005. Basedon further discussions and feedback with both the FDA and consultants helpingus dialog with the FDA, we determined that the current package for Orathecinwas not sufficient to gain approval at this time in the United States and weannounced the withdrawal of the NDA in January 2005. We currently have aPhase II clinical trial ongoing to study Orathecin and gemcitabine as afirst-line combination therapy for advanced pancreatic cancer patients who havenot undergone chemotherapy. We intend to make a decision on future developmentor the alternative disposition of Orathecin based on a review of the interimresults of this trial, which we expect to occur during the first half of 2006.

In July 2004, wesubmitted a MAA to the EMEA seeking approval of Orathecin. The MAA waswithdrawn in January 2006. Our registration strategy in Europe isdependent on the results of the U.S. Phase II results noted above.

*Nipent*

Through December 31,2005, we have spent approximately $17.0 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 34 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 of hospitalbuying groups. We have focused our efforts on selling to these groups sincethey control a significant majority of the business in the oncology and blooddisorder pharmaceutical market. We also market our products, including Nipent,to private practice oncology clinics, oncology distributors and drugwholesalers. 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 prior to bidding for thosecustomers.

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 turn 

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represent approximately30% of the oncology-related pharmaceutical market. We have takensignificant steps in building relationships with these distributors, all ofwhich distribute Nipent. Our sales force will also continue to target theimportant private practice oncology clinics within their assigned territories. Wealso sell to large drug wholesalers that supply hospitals and hospital buyinggroups. In addition, we have partnership arrangements with Group PhysicianOrganizations including Pharmatech, U.S. Oncology, and National OncologyAlliance.

Our sales group is dividedinto three regions. Each region is headed by a manager with extensive industryexperience who supervises specialty oncology sales representatives. Our salesand marketing group conducts direct sales, sponsors speakers’ programs, workswith distributors, performs market research analysis, develops marketingstrategies, creates and implements educational and promotional programs,establishes pricing and product advertising and maintains compliance withhospital and other 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.

We received approval from the FDA in May 2002 tocommercially manufacture Nipent at one of our designated vendor’s manufacturingsites using our proprietary manufacturing process. This company went out ofbusiness in late 2004. However, we have contracted with another manufacturer topurify Nipent, and we do not anticipate any interruptions to our supply of drugavailable for sale. In April 1998, the FDA approved our application forthe production and commercial distribution of mitomycin for injection. See “*Risk Factors—Our business may be harmed if the manufacture of ourproducts is interrupted or discontinued.”*

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

**BusinessRelationships and Material Contracts**

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

We identify andlicense or buy rights to products or compounds that are typically in humanclinical development. We then seek to enhance and complete the productdevelopment and bring the product to market internally or throughcollaborations. We have entered into a variety of strategic and collaborative 

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relationshipsand licensing agreements in pursuing our business. Some of our more significantrelationships are as follows:

1.     *MGI PHARMA, Inc—Dacogen*

In August 2004, we entered into a licenseagreement with MGI relating to Dacogen (the “License Agreement”), which becameeffective on September 21, 2004. Dacogen is an investigational anti-cancertherapeutic which has been in clinical trials for the treatment of patientswith MDS. Pursuant to the terms of the License Agreement, MGI receivedexclusive worldwide rights to the development, commercial­ization anddistribution of Dacogen for all indications. We continued to pursue with MGIregulatory approvals of Dacogen for the treatment of MDS in the United Statesand Europe and, in accordance with the License Agreement, all development ofDacogen was transitioned to MGI by the end of 2005. MGI assumed fulldevelopment responsibilities following the transition to them. MGI is requiredto fund further development costs associated with Dacogen at a minimum of $15million over a three year period. In addition to MDS, MGI will pursuedevelopment of Dacogen for other indications. If specified regulatory andcommercialization milestones are achieved, MGI will pay us up to $45 millionbased upon the achievement of such milestones. Subject to certain limitations,MGI will also pay us 50% of certain revenue payable to MGI as a result of MGIsublicensing rights to market, sell, and/or distribute Dacogen, to the extentsuch revenues are in excess of the milestone payments. We will receive aroyalty starting at 20% and escalating to a maximum of 30% on annual worldwidenet sales of licensed products.

Under the terms ofthe License 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 years ended December 31,2005 and 2004, we recorded development revenue of $3.4 million and $3.6million, respectively, relating to the reimbursements under this agreement. Duringthe year ended December 31, 2004, we recognized development revenue of$12.5 million for milestone achievement.

2.     *The Stehlin Foundation for 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 and otherintellectual property made jointly by employees or consultants of the partiesin connection with the agreement are jointly owned by the parties. In the eventStehlin elects to license any product (other than the Orathecin products) forhuman medicinal purposes 

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for any uses that includepancreatic cancer or antineoplastic use, we have the right of first refusal toobtain from  Stehlin a license underpatents owned or controlled by Stehlin to market such products.

We have paid Stehlin approximately $9.6 millionthrough December 31, 2005 for research under this agreement. Our agreementwith Stehlin also calls for additional payments in our common stock upon theachievement of specified milestones and royalties on any product sales. We mustmake milestone payments under the agreement upon (a) notification by theFDA of the acceptance for filing of the first NDA submitted for Orathecin and (b) ourreceipt of the FDA notice that it has approved Orathecin for marketing. Each ofsuch payments will be made in restricted shares of our common stock at a pershare purchase price equal to the average trading price of the shares over a 30-daytrading period. During the year ended December 31, 2004, the FDA acceptedfor filing our NDA submission for Orathecin. This triggered a requiredmilestone payment to Stehlin of $500,000. We made the milestone payment throughthe issuance of 63,969 shares of unregistered common stock, which wascalculated based on the average trading price of our stock during the 30-dayperiod preceding the payment date.

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

3.     *Pharmachemie—Dacogen*

InSeptember 1999, we entered into a Know-How Transfer and CooperationAgreement with Pharmachemie. Under the agreement, Pharmachemie sold andtransferred to us its know-how related to a pharmaceutical product approach forthe treatment of leukemia and other 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. Decitabine was subsequentlyrenamed Dacogen.

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

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

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 products underthe agreement, and any other intellectual property owned or licensed by Warner-Lambertas of the closing date necessary or helpful in the manufacture of thepentostatin products.

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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.

InFebruary 2004, we entered into a Purchase and Sale Agreement with PfizerInc. pursuant to which we acquired the right to market Nipent in Europe andassociated regulatory approvals and related assets. We paid Pfizer $1.0 million under thisagreement.

5.     *Peregrine Pharmaceuticals—VTA*

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 isrelated to VEGF. The VTA technology is a proprietary platform designed tospecifically target a tumor’s blood supply and subsequently destroy the tumorwith various attached therapeutic agents.

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

The agreement required an up-front payment of$600,000, which included the acquisition of 150,000 shares of Peregrine commonstock valued at $253,000. The remaining $347,000 of the payment was recorded asresearch and development expense. We are also required to pay Peregrine anannual license fee of $200,000 per year in cash or our common stock until thefirst filing of an 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 VTA 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) commencement by us of Phase III trial in the United States, Europe orJapan for subsequent therapeutic clinical candidates covered under the licensedpatents; (c) commencement by us of a Phase II/III trial, if any;(d) receipt of regulatory approval in the United States for the firsttherapeutic clinical candidate covered under the licensed patents;(e) receipt of regulatory approval in a European nation for the firsttherapeutic clinical candidate covered under the licensed patents; and(f) receipt of regulatory approval in Japan for the first therapeutic clinicalcandidate covered under the licensed patents.

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

6.     *AMUR Pharmaceuticals, Inc.*

In September 2000, we acquired the intellectualproperty of AMUR Pharmaceuticals, Inc. (“AMUR”) a company with theproprietary rights to AM 454, which can potentially prevent the onset of TypeII diabetes according to pre-clinical animal studies, and rights to a 20Kgrowth hormone, with potential for treatment of Type II diabetes. AMUR’stechnology is based on a water-soluble class of hormones. We acquiredthese rights in exchange for 37,795 shares of our common stock and two-yearwarrants to purchase 200,000 shares of our common stock at $40.00 per share. In2002, these warrants were extended for two additional years but expiredunexercised in 2004.

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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 such licensed products in the United States. Therights granted to us under the agreement are non-transferable, and we may notgrant sublicenses thereof.

In consideration ofthe rights granted under the agreement, we must pay a 3% royalty to Cyclex onour net sales of products covered by the licensed patent. Only one royaltypayment is due to Cyclex for the initial sale made by us or for the internaltransfer price of each licensed product. The agreement will remain in effectuntil the expiration of the licensed patent under the agreement, or a finalfinding of invalidity or withdrawal of the licensed patent, subject to earliertermination 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. Wepaid $350,000 in 2003 following the approval of Mitozytrex.

The agreement willremain in effect until the expiration of the last to expire patent rights underthe agreement, 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.

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Theagreement may be terminated by Jackson if we cease to carry on our business,fail to pay royalties owed under the agreement or otherwise materially breachthe agreement. We may terminate the agreement upon six month’s notice toJackson.

10.   *AVI BioPharma, Inc.—Avicine*

In December 1999, weentered into an agreement with AVI to acquire one million shares of AVI commonstock, which amounted to approximately 7.5 percent of AVI’s thenoutstanding common stock, for $2.5 million cash and 100,000 shares of ourcommon stock at $28.25 per share. The chief executive officer of AVI at thetime was a member of our board of directors (who later resigned from our boardin May 2002), and a former member of our board of directors was a memberof the board of directors of AVI through March 2004. 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 an immunotherapy that neutralizes theeffect of a tumor-associated antigen on cancer cells, while stimulatingthe body’s immune system to react against the foreign tumor.

In April 2000, weentered into a United States sales, distribution and development agreement withAVI to become the exclusive distributor and promoter in the United States ofany pharmaceutical product containing Avicine.

Under the terms of theagreement, we are responsible for advertising, marketing, selling and promotingAvicine in the United States, and AVI is responsible for product manufacturing,packaging, sterilization and labeling. AVI has granted us an exclusive licenseto sell the Avicine products in the United States. In the event that AVI or itsthird-party manufacturers are unable to fill product orders for a totalof 60 days, then we will have a non-exclusive license to manufactureAvicine products. If AVI is unable to meet its obligations under the agreementfor six months, AVI must notify us and the parties will consider steps topreserve our rights to Avicine, including, but not limited to, the grant of anon-exclusive, royalty bearing license to us to develop and sell Avicineproducts in the United States. Under the agreement, we also obtained the rightof first discussion with respect to all of AVI’s oncology compounds.

We formed a joint ClinicalDevelopment Committee with AVI to oversee, review and coordinate theimplementation of the clinical studies and the pursuit of regulatory approvalsin the United States, and we will equally share the costs for the FDA approvalprocess. In addition, any net profits from the sale of Avicine products in theUnited States will be split equally among the parties. Further, the partieswill jointly determine the optimum development strategy for the internationalmarketplace.

AVI will maintain anypatents owned by it or licensed to AVI relating to Avicine as identified andagreed to by the parties, and AVI will use its reasonable commercial efforts toprosecute any agreed upon patent applications. In addition, the parties willconsult together and jointly determine patent issues, including patentingstrategy, prosecution and response to patent office actions. AVI will be solelyresponsible for the selection, filing, registration and maintenance of any AVItrademarks related to Avicine in the United States. We have a non-exclusivelimited license to use AVI’s name and logo in the United States, and a co-exclusivelimited license to use AVI trademarks related to Avicine in the United States,in each instance solely for the purpose of promoting, distributing and sellingAvicine products in the United States in accordance with the terms andconditions of the agreement.

In consideration of pastresearch and development performed by AVI, we made an additional equityinvestment in AVI totaling $22.0 million in exchange for 1,684,211 sharesof AVI common stock, paid in a combination of $5.0 million cash and the issuanceof 347,826 shares of our common stock. As part of the agreement, we have awarrant to acquire up to an additional 10% of AVI’s common stock at anaggregate exercise price equal to $60.0 million, or $35.625 per share.This warrant is exercisable for a three-year period commencing on the earlierof the date the FDA accepts the NDA submitted for Avicine, or the date on whichthe closing price of AVI’s common stock exceeds the warrant exercise price.Neither event had occurred as of December 31, 2005.

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

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 weand 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***

We have enteredinto a variety of supply and distribution agreements in pursuing our 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 (“Abbott”). Under theagreement, we supplied Nipent inventory exclusively to Abbott on a consignmentbasis for distribution by Abbott within the United States. The agreement becameeffective on March 1, 2000, for a period of five years. We retained allUnited States promotional, advertising and marketing rights for Nipent. Uponreceipt by Abbott of orders for products under the agreement, Abbott shippedand invoiced 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 decreased 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.

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.

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

3.     *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.

In December 2002,we became 95% owners of EuroGen. The remaining 5% is owned by Larry Johnson,the President and CEO of EuroGen. Beginning in 2003, the results of EuroGenhave been included in our consolidated operations in Selling, general andadministrative expenses. During the years ended December 31, 2005, 2004,and 2003, we have recorded expenses of $3,170,000 and $2,269,000, and $325,000,respectively, related to EuroGen.

4.     *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 theagreement, we agreed to purchase a minimum quantity of paclitaxel before theend of one year from the date of approval of our ANDA for the paclitaxel drugproduct, on a non-exclusive basis. Yunnan is free to sell paclitaxel to anyparty in any place and we are free to purchase paclitaxel from third parties. Wepaid Yunnan an aggregate of $1.0 million during the FDA inspection periodfor the products.

5.     *Sigma-Aldrich FineChemicals (Tetrionics)—Nipent*

In September 2004, we entered into a DrugSubstance Validation and Supply Agreement with Tetrionics, Inc., nowSigma-Aldrich Fine Chemicals (“SAFC”), pursuant to which SAFC will validatecertain of our current manufacturing processes for Nipent and manufacturevalidation batches of Nipent using pentostatin crude concentrate supplied by usor parties authorized by us. Under the agreement, we will own all deliverablesand intellectual property related thereto and have access to SAFC facilitieswhere it performs the development and manufacturing activities to ensurecompliance with applicable standards and other requirements. In addition, SAFChas granted us a license under its proprietary technologies in 

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the event it does not oris unable to supply the Nipent it is obligated to do so and has agreed toassist us in securing alternate supply in such instance. SAFC will beresponsible for obtaining all necessary regulatory permits and other licensesin order to manufacture and supply Nipent to us under the agreement. Under theagreement, we agreed to pay SAFC a total of up to $595,000 based on performingof certain activities, providing certain deliverables and as reimbursement forcertain capital equipment which we will own, of which to date we have paid SAFC$207,500.

Under the agreement, weand SAFC have agreed to enter into a commercial manufacture and supplyagreement pursuant to which SAFC would manufacture and supply to us quantitiesof Nipent we order from time to time using pentostatin crude concentratesupplied by us or parties authorized by us. Subject to other conditions of thecommercial manufacture and supply agreement we will agree to purchase up to 50%of our commercial requirements for Nipent. The commercial manufacture andsupply agreement will include other standard and customary terms and conditionswhich have been agreed to by us and SAFC and set forth in the Drug SubstanceValidation and Supply Agreement, including price, forecasting requirements,product warranties and delivery terms. The commercial manufacture and supplyagreement will initially be for a five year term and thereafter extendable bymutual agreement of SAFC and us.

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

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

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

*Drugdiscovery.**  *In theinitial stages of drug discovery,  largenumbers of potential compounds are screened for activity. This drug discoveryprocess can take several years. Once a company defines a lead compound, thenext steps are to conduct further preliminary studies on the mechanism ofaction, further in vitro (test tube) screening against particular diseasetargets and finally, some in vivo (animal) screening. If the compound passesthese hurdles, animal toxicology studies are initiated. If the resultsdemonstrate acceptable levels of toxicity, the compound emerges from the basicresearch mode and moves into the pre-clinical phase.

*Pre-clinicaltesting.**  *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 can take several years tocomplete, and must be conducted in compliance with Good Laboratory Practice (“GLP”)regulations.

*Investigationalnew drug application.**  *Whenappropriate animal testing is evaluated and found to have an acceptable safetyprofile, the Company may decide to expand the development programs to aclinical setting. To accomplish this in the U.S. an IND, sometimes called a “clinicaltrial application,” is submitted to the FDA to begin human testing of the drug.Health Authorities in Europe require similar applications 

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to initiate human testingin countries governed by EU regulations. The IND submitted in the U.S. includesthe known chemistry of the compound, how the compound is manufactured, theresults of animal studies and other previous experiments, the method by whichit is believed to work in the human body, a proposed clinical development plan and how, where and by whom theproposed new clinical studies will be conducted. All clinical trials must beconducted in accordance with good clinical practices (“GCPs”). This means thatthe Company has specific obligations to monitor the study, collect the data andreport it at least annually to the FDA.

Independent of the Company, clinical study sites arereviewed by independent Institutional Review Boards (“IRB”) at the hospital orclinic where the proposed studies will be conducted. The IRB reviews andapproves the proposed protocol. It also has a responsibility to assess patientsafety.

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

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

*PhaseI clinical trials.**  *After anIND becomes effective, Phase I human clinical trials can begin. These trialsgenerally involve 20 to 80 healthy 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 may evaluate how a drug is absorbed,distributed, metabolized and excreted by the body, as well as the duration ofits action.

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

*PhaseIII clinical trials.**  *Thetrials are typically large, involving several hundred or even thousands ofpatients. Phase III trials typically compare an investigational agent against aproduct that is already approved for use in that disease. During these trials,physicians record observations as defined in the sponsor’s protocol onto CaseReport forms. The data generated in these studies are monitored regularly bycompany clinical monitors as well as the participating physician. There arespecific requirements for the physician to report any adverse reactions thatmay result from the use of the drug. Company clinical monitors visit the sitesregularly and transmit the data back to the company for analysis and ultimatelyfor presentation to the FDA.

*Marketing  application.**  *Companies have the opportunity to interact withhealth authorities in the US and EU during the course of a drug developmentprogram. Most companies take advantage of this access to gain further insightsabout the kinds of data that will be expected in their marketing application. Aftercompletion of the clinical trial phase, a company must compile all of thechemistry, manufacturing, preclinical and clinical data into a marketingapplication. In the United States, this is called an NDA; in the EU it is calleda MAA. This is a significant amount of information, often in excess of 100,000pages, 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 

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are specified timeframesfor the completion of review. This process may be extended if an agencyrequests additional information or clarification regarding the data provided inthe submission.

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

*Marketingapproval.**  *When ahealth authority grants marketing approval to a drug, it can now be madeavailable for physicians in that country or region to prescribe for theirpatients. Periodic safety reports must be submitted to health authorities asthey monitor the use of new drugs introduced to the market. Regulatory agenciesaround the world place great emphasis on pharmacovigilance, a term thatdescribes the need to monitor the safety of a drug when it is released forgeneral use, as this is very different than when it was studied in wellcontrolled clinical trials.

*PhaseIV clinical trials and post marketing studies.**  *In addition to studies that might have been requestedby health authorities as a condition of approval, clinical trials may beconducted to generate more information about the drug, including new dosageforms, new dosage regimens, etc. These studies may generate publications thatprovide further information to patients and the medical community.

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

SuperGen obtained fast track designation for Orathecinfor the treatment of patients with locally advanced or metastatic pancreaticcancer, and for Dacogen for the treatment of patients with MDS**,** and intends to seek such designation for other appropriateproducts. We cannot predict the ultimate impact, if any, of the fast trackprocess on the timing or likelihood of FDA approval of any of our potentialproducts.

*Approvalsin European Union.**  *In 1993,the EU established a system for the registration of medicinal products in theEU whereby marketing authorization may be submitted at either a centralized ordecentralized level. The centralized procedure is administered by the EMEA. Thisprocedure is mandatory for the approval of biotechnology products and isavailable at the applicant’s option for other innovative products. Thecentralized procedure provides for the granting of a single marketingauthorization that is valid in all EU member states. A mutual recognitionprocedure is available at the request of the applicant for all medicinalproducts that are not subject to the mandatory centralized procedure, under adecentralized procedure.

SuperGen has applied, through our European subsidiaryEuroGen, for regulatory approval to market mitomycin and paclitaxel in theUnited Kingdom and in certain other countries within the EU.

*Approvalsoutside of the United States and EU.**  *Steps similar to those in the United States must beundertaken in most other countries comprising the market for our productsbefore any such product can be commercialized in those countries. The approvalprocedure and the time required for approval vary from country to country andmay involve additional testing and cost. There can be no assurance that 

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approvals will be grantedon a timely basis or at all. In addition, pricing approval is required in manycountries and there can be no assurance that the resulting prices would besufficient to generate an acceptable return on investment.

*Off-Label Use.**  *Physicians may prescribe drugs for uses that are notdescribed in the product’s labeling. Such “off-label” uses are common acrossmedical specialties and may constitute the best treatment for many patients invaried circumstances. The FDA does not regulate the behavior of physicians intheir choice of treatments but it does limit a manufacturer’s communications onthe subject of off-label use. Companies cannot actively promote FDA approveddrugs for off-label uses.

*Generic drugdevelopment*

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

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

·       adrug product that differs with regard to certain changes from a listed drug ifthe FDA has approved a petition from a prospective applicant permitting 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.

*Other GovernmentRegulations*

In addition to laws andregulations enforced by the FDA, we are also subject to regulation by otheragencies under the Occupational Safety and Health Act, the EnvironmentalProtection Act, the Toxic Substances Control Act, the Resource Conservation andRecovery Act and other present and potential future federal, state or locallaws and regulations. These agencies have specialized responsibilities tomonitor the controlled use of hazardous materials such as chemicals, virusesand 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.

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***Orphan Drug Designation***

The United States, EU, Japan and Australia have allenacted “orphan drug” or rare disease programs for drugs intended to treat rarediseases. Orphan drug designation must be requested before submitting anapplication for marketing approval. After the granting of an orphan drugdesignation, the chemical identity of the therapeutic agent and its potentialorphan use are disclosed publicly. If and when a product with orphan drugstatus receives marketing approval for the orphan indication, the product isentitled to marketing exclusivity, which means the regulatory authority may notapprove any other applications to market the same drug for the same indicationfor seven years in the United States, ten years in Europe and Japan and four yearsin Australia.

Orathecin has receivedorphan drug designation from the FDA and the EMEA for treatment of patientswith refractory pancreatic cancer. Dacogen also received orphan drugdesignation from the FDA and EMEA for 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 “*Risk Factors—Our ability to protect our intellectual property rightswill be critically important to the success of our business, and we may not beable to protect these rights in the United States or abroad*.”

We actively pursue a policy of seeking patentprotection when applicable for our proprietary products and technologies,whether they are developed in-house or acquired from third parties. We attemptto protect our intellectual property position by filing United States andforeign patent applications related to our proprietary technology, inventionsand improvements that are important to the development of our business. Todate, we have acquired licenses to or assignments of over 50 United Statespatents covering various aspects of our proprietary drugs and technologies,including 37 patents for various aspects of Orathecin and related products, sixpatents under our Nipent product portfolio (although none covers the use of Nipentin an intravenous injectable formulation for the treatment of hairy cellleukemia), seven patents for our paclitaxel related products, three patents forDacogen related products used in combination with an anti-neoplasticagent for the treatment of cancer, and two patents for our Surface Safeproducts. We have been granted patents and have received patent licensesrelating to our proprietary formulation technology, non-oncology andPartaject technologies, among which at least five patents are issued or licensedto us. In addition, we are prosecuting a number of patent applications for drugcandidates that we are not actively developing at this time.

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

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

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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 the United States. In addition, lawsof foreign countries may not protect our intellectual property to the sameextent as would laws in the United States. To minimize our costs and expensesand maintain effective protection, we focus our foreign patent and licensingactivities primarily in the EU, Canada and Japan. In determining whether or notto seek a patent or to license any patent in a certain foreign country, weweigh the relevant costs and benefits, and consider, among other things, themarket potential and profitability, the scope of patent protection afforded bythe law of the jurisdiction and its enforceability, and the nature of termswith any potential licensees. Failure to obtain adequate patent protection forour proprietary drugs and technology would impair our ability to becommercially competitive 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 of havingour employees and consultants execute proprietary information agreements uponcommencement of employment or consulting relationships with us. Theseagreements provide that all confidential information developed or made known tothe individual during the course of the relationship is confidential except inspecified circumstances.

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

·       Nipent(registered in 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, Mexico, Panama, Poland, Portugal, Paraguay, Romania,Slovak Republic, South Africa, South Korea, Serbia-Montenegro, Switzerland,Taiwan, Ukraine, the United States and Uruguay);

·       SuperGen  is registered in Australia, the EU, HongKong, Japan, South Korea, Taiwan and the United States for use inpharmaceutical sales, and is the subject of pending applications for thosegoods in Brazil, Canada and Vietnam, as well as for manufacturing services inthe United States;

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

·       Dacogenis registered in Australia, the EU, and Japan; pending applications in Canada,Iceland, Mexico, Norway, Switzerland, Turkey, and the United States;

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

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

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

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

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

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**Competition**

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

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

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

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

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

**Employees**

As of December 31,2005, we had 83 full-time employees. We use consultants and temporary employeesto complement our staffing. Our employees are not subject to any collectivebargaining agreements, and we consider our relations with employees to be good.

**GeographicArea Financial Information**

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

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and 11%were made in the EU. In 2003, 97% of our sales were made in the United Statesand 3% in the EU.

**Available Information**

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

Financial and otherinformation about us is available on our website at www.supergen.com.  We 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 1A. RISK FACTORS**

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

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

***Risks Related to Dacogen, Orathecin and Nipent***

*If we do notreceive regulatory approval for Dacogen, our future revenues may be limited andour business would be harmed.*

Our NDA submission for Dacogen was accepted for filingby the FDA on December 31, 2004. On September 1, 2005, we received anApprovable Letter for Dacogen from the FDA, which provides that Dacogen isapprovable pending the FDA’s review of a requested analysis of the transfusionrequirements of patients enrolled in the completed Phase III trial, submissionof certain other information, and completion of labeling discussions. Wecompleted the collection and analysis of the data requested by the FDA andsubmitted our response to the Approvable Letter on November 15, 2005. On December 15,2005, the FDA accepted our resubmission as a complete response to theApprovable Letter. The resubmission has been classified by the FDA as a Class 2response, and the FDA established a user fee goal date to review the responseby May 15, 2006.   We believe thisresponse confirms the clinical benefit of Dacogen compared to supportive carewith regard to overall response rate, duration of response, and transfusionindependence in patients with MDS.

Our European subsidiary, EuroGen Pharmaceuticals Ltd.,submitted an MAA for Dacogen to the EMEA, which submission was accepted forreview on October 25, 2004. MGI and SuperGen determined that additionalclinical data will be required to continue the review of Dacogen in Europe. Therefore,we have withdrawn the MAA for Dacogen. This revision in the European regulatorystrategy for Dacogen does not affect regulatory strategies being pursued in theU.S.

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MGI and SuperGen will continue to work with Europeanregulatory authorities to determine the information required to support aresubmission of the application, and anticipate resubmitting the application ata later date. MGI anticipates that next steps in the European regulatorystrategy may be finalized in collaboration with a partner.

If Dacogen is unsuccessful for any reason, includingif the results of the Phase III study are deemed insufficient from either aclinical or statistical basis by the FDA, our future revenues would be limitedand our business would be harmed. Additionally, we might be forced tosubstantially scale down our operations or sell certain of our assets, and itis likely the price of our stock 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 commercialization milestones. Ifthese commercialization milestones are not met, we will not receive thesepayments and our financial condition and business would be harmed.

*Even if we receiveregulatory 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.

*We are currentlyconducting clinical trials with Orathecin as a combination therapy. If theseclinical trials do not support regulatory approval, our business may be harmed.*

In 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 conductclinical trials with Orathecin as a combination therapy while we review anddetermine whether or not we will continue to pursue regulatory approval forOrathecin. Clinical trials are expensive to conduct, time-consuming and haveuncertain outcomes. We will incur substantial expense while conducting thesestudies, and if we are unable to complete the studies, or if the results of thestudies do not support regulatory approval of Orathecin as a combinationtherapy, we will incur significant operating losses and our business will beharmed.

*Even if we receiveregulatory approval of Orathecin as a combination therapy, Orathecin may not becommercially successful.*

If Orathecin receivesregulatory approval in the United States as a combination therapy, patients andphysicians may not readily accept it, which would result in lower thanprojected 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 we are unable toexpand our clinical support for use of Nipent to treat additional diseases ourrevenues 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 marketing Nipent for the treatment ofpatients with hairy cell leukemia, and revenues from selling Nipent hasprovided the majority of our annual product revenues over the past three years.We are conducting a series of clinical trials with Nipent, including Phase IVtrials for CLL, NHL, cutaneous and 

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peripheralT-cell lymphomas and Phase II/III studies for GvHD. If our Nipent clinicaltrials are not successful, we will not be able to increase our revenue fromNipent.

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

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

Since inception, we have funded our research anddevelopment activities primarily from private placements and public offeringsof our securities, milestone payments and revenues generated primarily fromsales of Nipent, which is marketed in the United States for the treatment ofpatients with hairy cell leukemia. Our substantial research and developmentexpenditures and limited revenues have resulted in significant net losses. Wehave incurred cumulative losses of $348.0 million from inception through December 31,2005, and our products have not generated sufficient revenues to support ourbusiness during that time. We expect to continue to incur substantial operatinglosses at least through 2007 and may never achieve profitability.

Whether we achieveprofitability depends primarily on the following factors:

·       ourability to obtain regulatory approval for Dacogen and the successfulcommercialization of Dacogen by MGI;

·       ourability 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 clinicaltrials;

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

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

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

·       delaysin production 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.

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*We will requireadditional funding to expand our product pipeline, strengthen ourcommercialization efforts and expand our European operations, and if we areunable to raise the necessary capital or to do so on acceptable terms, ourplanned expansion and continued chances of survival could be 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 our capital resources will be adequate to fundoperations and capital expenditures through 2006. However, if we experienceunanticipated cash requirements during this period, we could require additionalfunds much sooner. We may raise money by the sale of our equity securities ordebt, or the exercise of outstanding warrants and stock options by the holdersof such warrants and options. However, given uncertain market conditions andthe volatility of our stock price, we may not be able to sell our securities inpublic offerings or private placements at prices and/or on terms that arefavorable to us, if at all. Also, the dilutive effect of additional financingscould adversely affect our per share results. We may also choose to obtainfunding through licensing and other contractual agreements. For example, werecently licensed the worldwide rights to the development, commercializationand distribution of Dacogen to MGI. Such arrangements may require us torelinquish our rights to our technologies, products or marketing territories,or to grant licenses on terms that are not favorable to us. If we fail toobtain adequate funding in a timely manner, or at all, we will be forced toscale back our product development activities, or be forced to cease ouroperations.

*Our collaborativerelationship with MGI may not produce the financial benefits that we areanticipating, 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 secure regulatory approval of Dacogen or due toour inability to expend the resources to commence sales of Dacogen asprescribed by the license agreement. In addition, the license agreementcontemplates that MGI will pay us (i) a certain portion of revenuespayable to MGI as a result of MGI sublicensing the rights to market, selland/or distribute Dacogen, to the extent such revenues are in excess of themilestone payments, and (ii) a 20% royalty increasing to a maximum of 30%on annual worldwide net sales of Dacogen. We cannot guarantee that we will everreceive these payments, as MGI may choose not to sublicense Dacogen at all, norcan we be assured that MGI will expend the resources to sell Dacogen worldwide,or be successful in doing so.

*Our equityinvestment in AVI exposes us to equity price risk and any impairment chargewould affect our results of operations.*

We are exposed to equity price risk on our equityinvestment in AVI. Currently we own 2,684,211 shares of AVI. During the yearended December 31, 2004, we recorded a write-down of $7.9 million relatedto an other than temporary decline in the value of our equity investment inAVI, 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 shareshad been 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 ofthe AVI shares have fluctuated significantly since we purchased them and couldcontinue to do so. If the public trading prices of these shares continue totrade below their new 

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cost basis in futureperiods, we may incur additional impairment charges relating to thisinvestment, which in turn will affect our results of operations.

In addition, in connectionwith the restructuring of our February Notes and the issuance of the June Notes,we issued three-year warrants to the June Note holders exercisable into2,634,211 of our AVI shares at an exercise price of $5.00 per share, and wepledged the AVI shares to secure our obligation under the June Notes.These warrants expire on December 31, 2006.

***Product Development and Regulatory Risks***

*Before we can seekregulatory approval of any of our product candidates, we must complete clinicaltrials, which are expensive and have uncertain outcomes.*

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

We have a portfolio of cancer drugs in various stagesof development, including Nipent (for indications other than hairy cellleukemia, Phase IV), Partaject busulfan (Phase I/II), Orathecin capsules as acombination therapy (Phase II), and we have been conducting pre-clinicalstudies for VEGF and Cremophor-free paclitaxel. In addition, we expect tocommence new clinical trials from time to time in the course of our business asour product development work continues. Conducting clinical trials is alengthy, time consuming and expensive process and the results are inherentlyuncertain. We have incurred and will continue to incur substantial expense for,and we have devoted and expect to continue to devote a significant amount oftime to, pre-clinical testing and clinical trials. However, regulatoryauthorities may not permit us to undertake any additional clinical trials forour product candidates. If we are unable to complete our clinical trials, ourbusiness will be severely harmed and the price of our stock will likelydecline.

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.

*Our clinical trialsmay be delayed or terminated, which would prevent us from seeking necessaryregulatory approvals.*

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

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

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

·       inabilityto obtain FDA approval of our clinical trial protocols;

·       slowerthan expected rate of patient recruitment;

·       inabilityto adequately follow patients after treatment;

·       difficultyin managing multiple clinical sites;

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·       unforeseensafety issues;

·       lackof efficacy demonstrated during the clinical trials; or

·       governmentor regulatory delays.

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

*We may be requiredto suspend, repeat or terminate our clinical trials if they are not conductedin compliance with regulatory requirements.*

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 certain aspectsof our research and development activities to contract research organizations (“CROs”).We have agreements with these CROs for certain of our clinical programs. We andour CROs are required to comply with GCPs, regulations and guidelines enforcedby the FDA for all of our products in clinical development. The FDA enforcesGCPs through periodic inspections of study sponsors, principal investigators,and study sites. If our CROs or we fail to comply with applicable GCPs, theclinical data generated in our studies may be deemed unreliable and the FDA mayrequire us to perform additional studies before 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.

*We may be requiredto suspend, repeat or terminate our clinical trials if later trial results failto demonstrate safety and efficacy, or if the results are negative,inconclusive or if they fail to demonstrate safety or efficacy.*

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

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

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

*Our failure toobtain regulatory approvals to market our product candidates in foreigncountries would adversely affect our anticipated revenues.*

Sales of our products in foreign jurisdictions will besubject to separate regulatory requirements and marketing approvals. Approvalin the United States, or in any one foreign jurisdiction, does not ensure 

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approval in any otherjurisdiction. The process of obtaining foreign approvals may result insignificant delays, difficulties and expenses for us, and may requireadditional clinical trials. We have applied through our subsidiary EuroGen forregulatory approval to market mitomycin and paclitaxel in the United Kingdomand in other countries within the European Union. Although many of theregulations applicable to our products in these foreign countries are similarto those promulgated by the FDA, many of these requirements also vary widelyfrom country to country, which could delay the introduction of our products inthose countries. Failure to comply with these regulatory requirements or toobtain required approvals would impair our ability to commercialize ourproducts in foreign markets.

Nipent is currently soldin Europe, and in early 2004 we acquired the rights to market Nipent theredirectly. We plan to directly commercialize and market Nipent in Europe during2006. However, our revenue from sales of Nipent in Europe is currently lessthan 10% of our total sales, and there is no guarantee that our marketingefforts will result in significantly increased revenues. Our strategy is toobtain regulatory approvals to sell our products in Europe and elsewhere, andwe intend to contract with third-party licensees or distributors for salesoutside the United States. Delays in obtaining regulatory approval from foreignjurisdictions will impair the commercialization of our products and would delayanticipated revenues.

*Even if we obtainregulatory approval, we will continue to be subject to extensive governmentregulation that may cause us to delay the introduction of our products orwithdraw our products from the market.*

Even if regulatory approval of our products isobtained, later discovery of previously unknown problems may result inrestrictions of a product, including withdrawal of that product from themarket. Further, governmental approval may subject us to ongoing requirementsfor post-marketing studies. For example, despite receipt of governmentalapproval, the facilities of our third-party manufacturers are stillsubject to unannounced inspections by the FDA and must continue to comply withGMPs and other regulations. These regulations govern all areas of production,record keeping, personnel and quality control. In the past, our third-partymanufacturers have experienced delayed FDA approval, which adversely affectedour ability to supply Nipent in 2002. If we or our third-partymanufacturers fail to comply with any of the manufacturing regulations, we maybe subject to, among other things, product seizures, recalls, fines,injunctions, suspensions or revocations of marketing licenses, operatingrestrictions and criminal prosecution.

Physicians may prescribedrugs for uses that are not described in a product’s labeling that differ fromthose tested by us and approved by the FDA. While such “off-label” uses arecommon and the FDA does not regulate physicians’ choice of treatments, the FDAdoes restrict a manufacturer’s communications on the subject of off-label use. Companiescannot actively promote FDA-approved drugs for off-label uses, but they maydisseminate to physicians articles published in peer-reviewed journals. To theextent allowed by law, we intend to disseminate peer-reviewed articles on ourproducts to our physician customers. If, however, our promotional activitiesfail to comply with the FDA’s regulations or guidelines, we may be subject toenforcement action by the FDA. For example, in June 2005 we received aWarning Letter from the FDA regarding certain promotional materials wedisseminated for Nipent. The FDA asserted that these materials were false ormisleading because they failed to present any risk information, contained anunsubstantiated claim regarding the mechanism of action, and overstated thesafety and efficacy of the drug. In response, we recalled these materials fromthe field and commenced modifying our internal procedures to ensure that futureNipent marketing materials and promotional activities meet regulatoryrequirements. We will also be sending a corrective communication to physicianswho received the violative Nipent materials. The FDA has accepted our remedialactions, nonetheless, any further Warning Letters or enforcement actions by theFDA could harm our reputation in the market, result in significant fines orhave other affects that could harm our business.

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*The continuingefforts of government and third-party payers to contain or reduce thecosts of healthcare may adversely affect our revenues.*

Sales of our products depend in part upon the availabilityof reimbursement from third-party payers, such as health administrationauthorities like Medicare/Medicaid, managed care providers and private healthinsurers. Third-party payers are increasingly challenging the price andexamining the cost effectiveness of medical products and services, which mayeffectively limit physicians’ ability to 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 tocomply with environmental laws and regulations, our business may be harmed.*

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

We currently outsourcecertain of our research and development programs involving the controlled useof biohazardous materials. We believe our collaborators have in place safetyprocedures for these materials that comply with governmental standards.Nevertheless, if an accident does occur, our research and product developmentwill be negatively affected.

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

*We recentlyannounced our intent to acquire Montigen Pharmaceuticals, Inc. Thistransaction could disrupt our business and harm our financial condition if weare not able to successfully close the acquisition or successfully integrateMontigen’s business and technology into ours, and if we do close theacquisition, the expected benefits of the combination may not materialize.*

We recently entered into an agreement to acquireMontigen Pharmaceuticals, Inc. for cash and shares of our common stockvalued at approximately $40.0 million, including $22.0 million contingent uponthe achievement of specific regulatory milestones. We have, and will continueto, expend significant efforts on closing this transaction. Such efforts arecostly from both a personnel and financial perspective, distract key personnelfrom their ordinary responsibilities, and may or may not ultimately result inthe consummation of the acquisition. The closing of the transaction is subjectto numerous variables, some of which are beyond our control. There can be noassurance that we will be able to close the Montigen acquisition, and 

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failure to do so maynegatively affect our financial results, employee and investor confidence, andultimately our stock price.

The Montigen acquisitioninvolves numerous risks, including problems combining the purchased operationsor technologies, unanticipated costs and diversion of management’s attentionfrom our core business. In addition, we may have to restructure aspects of ourbusiness in order to achieve anticipated synergies.  There can be no assurance that we will be ableto successfully integrate Montigen and its technology and personnel into ourbusiness. The failure to effectively manage the acquisition and integration ofMontigen could disrupt our business and harm our financial results. Further, ifconsummated, the transaction will dilute our existing stockholders’ percentageownership and decrease our cash position.

*If the third-partymanufacturers upon whom we rely fail to produce our products in the volumesthat we require on a timely basis, or fail to comply with stringent regulationsapplicable to pharmaceutical drug manufacturers, we may face delays in thedelivery of, or be unable to meet demand for, our products.*

Because we have nomanufacturing facilities, we rely on third parties for manufacturing activitiesrelated to all of our products. As we develop new products and increase salesof our existing products, we must establish and maintain relationships withmanufacturers to produce and package sufficient supplies of our finishedpharmaceutical 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) manufacturesuch quantities to our specifications or (b) deliver such quantities onthe dates we require, which could cause delay or suspension of clinical trials,regulatory submissions and commercialization of our products;

·       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 could delay clinical trials orcommercialization of our product candidates under development, interfere withcurrent sales and entail higher costs. For example, a failed production batchof Nipent in the second quarter of 2003 affected our ability to supply Nipentand 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 ifthe manufacturer’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 beharmed if the manufacture of our products 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 

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limitednumber of companies on a worldwide basis who operate manufacturing facilitiesin which our products can be manufactured to our specifications and incompliance with GMPs. It could take several months, or significantly longer,for a new contract manufacturing facility to obtain FDA approval and to developsubstantially equivalent processes for the production of our products. We maynot be able to contract with any of these companies on acceptable terms, if atall. For example, the company that had been purifying Nipent filed forreorganization under Chapter 11 and ceased operations in late 2004. We havecontracted with another manufacturer for the purification of Nipent. If the newmanufacturer is not qualified by the FDA or if the new manufacturer should goout of business, we may not have adequate inventory levels to sustain our businesswhile we identify and contract with another manufacturer for the purificationof Nipent.

*If our supplierscannot provide the components we require, our product sales and revenue couldbe harmed.*

We rely on third-party suppliers to provide uswith numerous components used in our products under development, includingOrathecin. Relying on third-party suppliers makes us vulnerable tocomponent failures and interruptions in supply, either of which could impairour ability to conduct clinical trials or to ship our products to our customerson a timely basis. Using third-party suppliers makes it difficult andsometimes impossible for us to maintain quality control, manage inventory andproduction schedules and control production costs. Vendor lead times to supplyus with ordered components vary significantly and can exceed six months ormore. Both now and as we expand our need for manufacturing capacity, we cannotbe sure that our suppliers will furnish us with required components when weneed them. These factors could make it difficult for us to effectively andefficiently manufacture our products, and could adversely impact our clinicaltrials, product development and sales of our products.

Some suppliers are our only source for a particularcomponent, which makes us vulnerable to cost increases and supplyinterruptions. We generally rely on one manufacturer for each product. We relyon one manufacturer for Nipent, a sole source supplier for the processing ofpentostatin, which is used in the manufacturing of Nipent, and a sole sourcesupplier for the ingredient used in the purification of pentostatin. We alsorely on sole source suppliers for mitomycin products and 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.

*We have limitedsales and marketing capabilities and may not be able to successfullycommercialize our products.*

We currently have limited sales and marketingresources. Although we have 34 sales, marketing and sales support personnelfocusing on the sale of our products to hospitals and hospital buying groups,we must expand our sales and marketing organization to supportcommercialization of our new products. Building up our sales capabilities willrequire significant expenditures. We may not succeed in expanding and enhancingour sales and marketing capabilities or have sufficient resources to do so. Ifwe do develop such capabilities, we will compete with other companies that haveexperienced and well-funded sales and marketing operations. We may not be ableto upgrade our in-house sales expertise which may limit our ability to gainmarket acceptance for our products worldwide and generate revenues. If we failto establish 

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successful sales andmarketing capabilities, we will not be able to market or sell our productseffectively and our business, financial condition and results of operationswill be materially and adversely affected.

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 ableto maintain and successfully establish new collaborative and licensingarrangements with third parties, our product development and business will beharmed.*

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 berequired to 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 the collaboration with us less attractive to them for a number ofreasons. For example, if an existing collaborator purchases a company that isone of our competitors, that company may be less willing to continue itscollaboration with us. A company that has a strategy of purchasing companieswith attractive technologies might have less incentive to enter into acollaboration agreement with us. Moreover, disputes may arise with respect tothe ownership of rights to any technology or products developed with anycurrent or future collaborator. Lengthy negotiations with potentialcollaborators or disagreements between us and our collaborators may lead todelays in or termination of the research, development or commercialization ofproduct candidates or result in time consuming and expensive litigation orarbitration.

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*Our collaborativerelationships with third parties could cause us to expend significant funds ondevelopment costs with no assurance 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 Vascular TargetingAgent, which is a proprietary platform designed to specifically target a tumor’sblood supply and subsequently destroy the tumor with various attachedtherapeutic agents. The licensed technology is specifically related to VEGF.Under the agreement, we made an up-front equity investment in Peregrine of$600,000 and will be obligated to make subsequent milestone payments that couldultimately total $8.25 million. In addition, we will pay royalties toPeregrine based on the net revenues of any drugs we commercialize using theVEGF 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 toprotect our intellectual property rights will be critically important to thesuccess of our business, and we may not be able to protect these rights in theUnited 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 50 U.S.patents covering various aspects of our proprietary drugs and technologies,including 37 patents for various aspects of Orathecin and related products, sixpatents under our Nipent product portfolio, although none covers the use ofNipent for the treatment of patients with hairy cell leukemia, seven patentsfor our paclitaxel related products, three patents for Dacogen used in combinationwith an anti-neoplastic agent for the treatment of cancer, and two patentsfor our Surface Safe product. These issued United States patents will begin toexpire in October 2012. We have been granted patents and have receivedpatent licenses relating to our proprietary formulation technology, non-oncologyand Partaject technologies, among which at least five patents are issued orlicensed to us. In addition, we are prosecuting a number of patent applicationsfor drug candidates that we are not actively developing at this time.

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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 maintain effective protection, we focus our foreign patent andlicensing activities primarily in 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.

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. Theselicenses and 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 tocompete effectively against other pharmaceutical companies, our business willsuffer.*

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.

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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 forproducts, or are developing or testing product candidates that compete directlywith, our product candidates. For example, while we received orphan drug statusfor Orathecin and there is currently no competitor in the oral delivery marketfor the treatment of pancreatic cancer, there are approved drugs for thetreatment of pancreatic cancer, including gemcitabine by Eli Lilly. In addition,Berlex Laboratories’ fludarabine competes with Nipent in the leukemia market,and Dacogen faces potential competition from Pharmion’s Vidaza, which wasapproved by 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 our product candidates, we willbe 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 pharmaceuticalindustry in general and the oncology sector in particular is subject tosignificant and rapid technological change. Developments by competitors mayrender our product candidates or technologies 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 

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obsoleteor our competitors’ products may be more effective or more effectively marketedand sold than our products. Technological advances, competitive forces and lossof intellectual property protection rights for our products may render ourproducts obsolete.

*We are developingproducts based upon compounds that may be covered by patents held by thirdparties that are expected to expire or already expired. These compounds mayalso be the subject of method, formulation, and manufacturing process patentsheld by third parties. If these patents do not expire as anticipated or areexpanded in scope, we will not be able 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 ANDA’s for our generic mitomycin for solid tumors for our generic paclitaxel.

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.

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

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

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

Clinical trials andcommercial use of our current and potential products may expose us to liabilityclaims from the use or sale of these products. Consumers, healthcare providers,pharmaceutical companies 

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andothers selling such products might make claims of this kind. We may experiencefinancial losses in the future due to product liability claims. We haveobtained limited product liability insurance coverage for our products andclinical trials, under which the coverage limits are $10.0 million peroccurrence and $10.0 million in the aggregate. We do not know whether thiscoverage will be adequate to protect us in the event of a claim. We may not beable to obtain or maintain insurance coverage in the future at a reasonablecost or in sufficient amounts to protect us against losses. If third partiesbring a successful product liability claim or series of claims against us foruninsured liabilities or in excess of insured liabilities, we may not havesufficient financial resources to complete development or commercialization ofany of our product candidates and our business and results of operations willbe adversely affected.

*If we are unable toattract and retain additional, highly skilled personnel required for theexpansion of our activities, our business will suffer.*

Further, our success isdependent on key personnel, including members of our senior management andscientific staff. If any of our executive officers decides to leave and wecannot locate a qualified replacement in time to allow a smooth transition, ourbusiness operation may be adversely affected. To successfully expand ouroperations, we will need to attract and retain additional highly skilledindividuals, particularly in the areas of sales, marketing, clinicaladministration, preclinical and development research, manufacturing andfinance. We compete with other companies for the services of existing andpotential employees, however to the extent these employees favor larger, moreestablished employers, we may be at a disadvantage.

*Earthquake or othernatural or man-made disasters and business interruptions could adversely affectour business.*

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

*Provisions in ourcertificate of incorporation, bylaws and applicable Delaware law may prevent ordiscourage third parties or stockholders from attempting to replace ourmanagement.*

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 owning 15% ormore of a corporation’s outstanding voting stock from engaging in businesscombinations with a Delaware corporation for three years following the date thestockholder acquired 15% or more of a corporation’s outstanding voting stock.This restriction is subject to exceptions, including the approval of 

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the board of directors andof the holders of at least two-thirds of the outstanding shares of voting stocknot owned by the interested stockholder.

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

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

**None**

**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 currentlybeing subleased through the end of our lease term. We believe the aboveproperties are adequate and suitable for our operations in the foreseeablefuture.

**ITEM 3. LEGAL PROCEEDINGS.**

We are not currentlysubject to any pending material legal proceedings.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

**None**

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**PART II**

**ITEM5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES.**

**Market for Common Stock**

Ourcommon stock trades on the Nasdaq National Market under the symbol “SUPG.”  The following table sets forth the high andlow sales information for our common stock for each quarterly period in the twomost recent fiscal years as reported on the Nasdaq National Market:

| ** **                              | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------|------------|----------|------------|---------|------------|
| **2005**                                |       |     |       |    |       |
| Quarter ended  March 31, 2005      |       | $        | 6.31       |    | $          | 4.29 |   |
| Quarter ended June 30,  2005       |       | 5.20     |       | 4.00    |       |
| Quarter ended  September 30, 2005. |       | 7.24     |       | 4.80    |       |
| Quarter ended  December 31, 2005   |       | 6.48     |       | 4.93    |       |
| **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    |       |

 

**Holders of Record**

As of March 8, 2006,there were 573 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.

**RecentSales of Unregistered Securities**

None.

**Purchaseof Equity Securities by the Issuer**

None.

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**ITEM 6. SELECTED FINANCIAL DATA.**

Theinformation set forth below is not necessarily indicative of results of futureoperations and should be read in conjunction with the financial statements andnotes thereto appearing in Item 15 of Part IV of this report.
|                                                                     | ** ** | **Year ended December 31,**                         | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of  Operations Data:**                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total revenue                                                       |       | $                                                                  | 30,169     |   | $ | 31,993 |   | $ | 11,494 |   | $ | 15,269 |   | $ | 11,451 |   |
| Cost of product  revenue                                            |       | 3,051                                                              |       | 4,135 |   | 3,865 |   | 4,491 |   | 2,727 |   |
| Research and  development                                           |       | 15,059                                                             |       | 23,978 |   | 26,312 |   | 29,895 |   | 47,833 |   |
| Selling, general  and administrative                                |       | 28,046                                                             |       | 28,800 |   | 24,436 |   | 23,525 |   | 22,079 |   |
| Acquisition of  in-process research and development            |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Loss from  operations                                               |       | (15,987                                                            | )          | (24,920 | ) | (43,119 | ) | (42,642 | ) | (61,188 | ) |
| Other income  (expense).                                            |       | 1,505                                                              |       | (21,940 | ) | (10,351 | ) | (6,829 | ) | 5,622 |   |
| Net loss                                                            |       | $                                                                  | (14,482    | ) | $ | (46,860 | ) | $ | (53,470 | ) | $ | (49,471 | ) | $ | (55,566 | ) |
| Basic and diluted  net loss per common share                        |       | $                                                                  | (0.28      | ) | $ | (1.04 | ) | $ | (1.56 | ) | $ | (1.52 | ) | $ | (1.69 | ) |
| Shares used to compute  basic and diluted net loss per common share |       | 51,309                                                             |       | 44,953 |   | 34,276 |   | 32,542 |   | 32,925 |   |
|                                                                     |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                                                                                    | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                         | ** ** | **(In thousands)**               | ** ** |
| **Consolidated Balance Sheet  Data:**                                                              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents, marketable securities, investments, and restricted cash and  investments. |       | $                                     | 60,289     |   | $ | 67,047 |   | $ | 39,926 |   | $ | 39,982 |   | $ | 77,359 |   |
| Other current  assets                                                                              |       | 8,972                                 |       | 22,444 |   | 9,035 |   | 9,744 |   | 5,807 |   |
| Property, plant  and equipment, net                                                                |       | 2,907                                 |       | 3,635 |   | 4,420 |   | 5,443 |   | 6,345 |   |
| Other assets                                                                                       |       | 1,103                                 |       | 1,531 |   | 1,355 |   | 2,164 |   | 33,206 |   |
| Total assets.                                                                                      |       | $                                     | 73,271     |   | $ | 94,657 |   | $ | 54,736 |   | $ | 57,333 |   | $ | 122,717 |   |
| Convertible debt,  net of discounts.                                                               |       | $                                     | —     |   | $ | — |   | $ | 13,593 |   | $ | — |   | $ | — |   |
| Other current  liabilities                                                                         |       | 8,042                                 |       | 20,517 |   | 11,821 |   | 7,548 |   | 12,752 |   |
| Non-current  liabilities                                                                           |       | 972                                   |       | 927 |   | 2,475 |   | 1,783 |   | 2,167 |   |
| Stockholders’  equity                                                                         |       | 64,257                                |       | 73,213 |   | 26,847 |   | 48,002 |   | 107,798 |   |
| Total liabilities  and stockholders’ equity                                                   |       | $                                     | 73,271     |   | $ | 94,657 |   | $ | 54,736 |   | $ | 57,333 |   | $ | 122,717 |   |
| Cash dividends per share                                                                           |       | —                                |       | — |   | — |   | — |   | — |   |
|                                                                                                    |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

*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  of receiving FDA approvalof our NDA for Dacogen; our expectations regarding milestone revenues under ouragreement with MGI; our estimates about becoming profitable; our forecastsregarding our research and development expenses; and our statements regardingthe sufficiency of our cash to meet our operating needs. Our actual resultscould differ materially from those predicted in the forward-lookingstatements as a result of risks and uncertainties including, but not limitedto, delays and risks associated with conducting and managing our clinicaltrials, developing products and obtaining regulatory approval; ability toestablish and maintain collaboration relationships; competition; ability toobtain funding; ability to protect our intellectual property; our dependence onthird party suppliers; risks associated with the hiring and loss of keypersonnel; adverse changes in the specific markets for our products; andability to launch and commercialize our products including our ability toachieve the milestones that may entitle us to receive royalty payments fromMGI. Certain unknown or immaterial risks and uncertainties can also affect ourforward-looking statements. Consequently, no forward-lookingstatement can be guaranteed and you should not rely on these forward-lookingstatements. For a discussion of the known and material risks that could impactour actual results, please see “Risk Factors” in this report. We undertake noobligation to update any forward-looking statements, whether as a result of newinformation, future events or otherwise.*

**Overview**

We are a pharmaceutical company dedicated to thedevelopment and 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. Our primaryobjective is to become a leading supplier of therapies for solid tumors,hematological malignancies, and blood disorders.

Since our incorporation in 1991 we have devotedsubstantially all of our resources to our product development efforts.Currently we have three key compounds, Dacogen, Orathecin, and Nipent, that arethe focus of our efforts.

*Dacogen.**  *Our NDAsubmission for Dacogen was accepted for filing by the FDA on December 31,2004. On September 1, 2005, we received an Approvable Letter for Dacogenfrom the FDA, which provides that Dacogen is approvable pending the FDA’sreview of a requested analysis of the transfusion requirements of patientsenrolled in the completed Phase III trial, submission of certain otherinformation, and completion of labeling discussions. We completed thecollection and analysis of the data requested by the FDA and submitted ourresponse to the Approvable Letter on November 15, 2005. On December 15,2005, the FDA accepted our resubmission as a complete response to theApprovable Letter. The resubmission has been classified by the FDA as a Class 2response, and the FDA established a user fee goal date to review the responseby May 15, 2006.   There can be no guarantee that the FDA willapprove Dacogen.

Our European subsidiary, EuroGen Pharmaceuticals Ltd.,submitted an MAA for Dacogen to the EMEA, which submission was accepted forreview on October 25, 2004. MGI and SuperGen determined that additionalclinical data will be required to continue the review of Dacogen in Europe. Therefore,we withdrew the MAA for Dacogen in November 2005. This revision in theEuropean regulatory strategy for Dacogen does not affect regulatory strategiesbeing pursued in the U.S.

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During September 2004, weexecuted a definitive agreement granting MGI exclusive worldwide rights to thedevelopment, manufacture, commercialization and distribution of Dacogen. Underthe terms of the agreement, MGI made a $40.0 million equity investment in usand will pay up to $45.0 million in specific regulatory and commercializationmilestones. To date, we have received $12.5 million of these 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.

*Orathecin.**  *In January 2004we submitted an NDA under accelerated approval procedures to the FDA forOrathecin for the treatment of pancreatic cancer patients that have failed oneor more therapies. The filing was accepted by the FDA and indicated a targetresponse date in November 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 second and third line patients. The FDA classified these dataas a Major Amendment, which triggered an extension of the review period by 90days, resulting in a revised target response date in February 2005. Basedon further discussions and feedback with both the FDA and consultants helpingus dialog with the FDA, we determined the current package for Orathecin was notsufficient to gain approval at this time in the United States and we withdrewthe NDA in January 2005. We currently have a Phase II clinical trialongoing to study Orathecin and gemcitabine as a first-line combination therapyfor advanced pancreatic cancer patients who have not undergone chemotherapy. Weintend to make a decision on future development or the alternative dispositionof Orathecin based on a review of the interim results of this trial, which weexpect to occur during the first half of 2006.

In July 2004, we submitted a MAA to the EMEAseeking approval of Orathecin. Based on extensive discussions with the EMEA, wewithdrew the MAA in January 2006. Our future registration strategy inEurope is dependent on the results of the U.S. Phase II results noted above.

*Nipent.**  *Nipent isapproved by the FDA and EMEA for the treatment of hairy cell leukemia and ismarketed by us in the United States and distributed in Europe. Nipent has also shown promise in other diseasesand we are conducting a series of post-marketing Phase IV clinical trials forCLL, NHL, cutaneous and peripheral T-cell lymphomas and GvHD.

*OtherProducts.**  *Ourportfolio of other products includes Partaject-delivered busulfan. Wealso market Surface Safe. We have also received regulatory approval to marketMitozytrex (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. Moreover, we hold United States sales and marketingrights to the cancer vaccine Avicine. We are continually evaluating our productportfolio to determine whether it is appropriate for us to dedicate theresources needed to commercialize these products ourselves or whether we wouldbe better served selling or licensing the rights to develop these products tothird parties.

*MontigenAcquisition.**  *On January 27, 2006, we announced that we have entered into adefinitive agreement to acquire Montigen, a privately-held oncology-focuseddrug discovery and development company headquartered in Salt Lake City, Utah. Montigen’sassets include its research and development team, a proprietary drug discoverytechnology platform and optimization process, CLIMB, and late-stage pre-clinicalcompounds targeting aurora-A kinase and members of the tyrosine kinase receptorfamily. One of the Montigen compounds is expected to be the subject of apre-IND meeting with the FDA later this year. Pursuant to the terms of theagreement, we will pay the Montigen stockholders a total of $18.0 million uponthe closing of the transaction, consisting of $9.0 million in cash and $9.0million in shares of SuperGen common stock. We will pay the Montigenstockholders an additional $22.0 million in shares of SuperGen common stock,contingent upon achievement of specific regulatory milestones. Completion ofthe acquisition will be subject to approval by the Montigen stockholders,customary closing conditions, and 

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the issuance of a permitfrom the Commissioner of Corporations for the State of California so that theissuance of the shares of SuperGen common stock will be exempt fromregistration under the Securities Act of 1933. The proposed transaction isexpected to close in late March 2006.

To date, our product revenues have been limited andare derived primarily from sales of Nipent, which we are marketing in theUnited States and distributing in Europe for the treatment of hairy cellleukemia. Most of our products are still in the development stage, and we will requiresubstantial additional investments in research and development, clinicaltrials, regulatory and in sales and marketing activities to commercializecurrent and future product candidates. Conducting clinical trials is a lengthy,time-consuming, and expensive process involving inherent uncertainties andrisks, and our studies may be insufficient to demonstrate safety and efficacyto 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 $348.0 million through December 31, 2005, andhave never generated enough funds through our operations to support ourbusiness. We expect to continue to incur operating losses at least through2007.

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 ongoing costs andoperating expenses. If the results from our clinical trials are not positive,we may not be able to get sufficient funding to continue our trials or conductnew trials, and we would be forced to scale down or cease our businessoperations. Moreover, if our products are not approved or commercially acceptedwe will remain unprofitable for longer than we currently anticipate. Additionally,we might be forced to substantially scale down our operations or sell certainof our assets, and it is likely the price of our stock would declineprecipitously.

**Critical Accounting Policies**

Our management discussion and analysis of ourfinancial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, andreported disclosures. On an on-going basis, we evaluate our estimates,including those related to revenue recognition, intangible assets, valuation ofinvestments and derivative instruments. We base our estimates on historicalexperience and on various other assumptions that we believe are reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions 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. Revenue is recognized upon customer receiptof the shipment, provided the title to the product transfers at the point ofreceipt by the 

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customer.If the title to the product transfers at the point of shipment, revenue isrecognized upon shipment of the product.

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 product revenue. In estimating returns, weanalyze historical returns and sales patterns, the remaining shelf life ofinventory, and changes in demand. We continually assess our historicalexperience and adjust our allowances as appropriate. If actual product returnsand exchanges are greater than our estimates, additional allowances may berequired. We recordestimated sales reserves for rebates and government chargebacks by analyzinghistorical rebate and chargeback percentages, contractual prices and otherfactors, as required. Significant judgment is inherent in the selection ofassumptions and in the interpretation of historical experience as well as theidentification of external and internal factors affecting the estimate ofreserves for product returns and chargebacks. We routinely assess thehistorical returns and other experience and adjust the reserves as appropriate.

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.

*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 investments maynot 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 equity securities without readilydeterminable fair value are carried at cost. We periodically review thosecarried costs and evaluate whether an impairment has occurred. Thedetermination of whether an impairment has occurred requires significantjudgment, as each investment may have unique market or developmentopportunities.

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*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 31,2005, 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 of Operations**

***Year ended December 31,2005 compared with year ended December 31, 2004:***
|                                           | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Revenues**                              | ** ** | ** **                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| ** **                                |       |                                 |       |       |       |       |       |   |   |
| Net product  revenue                      |       | $                                    | 16,059     |       | $          | 13,127     |       | $ | 2,932 |   | 22.3 | % |
| Development and  license revenue          |       | 13,353                               |       | 18,866     |       | (5,513     | )          | (29.2 | ) |
| Distribution agreement  and other revenue |       | 757                                  |       | —     |       | 757        |       | — |   |
|                                           |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |

 

The increase in net product revenue for 2005 was dueprimarily to higher unit sales of Nipent. Net sales of Nipent wereapproximately $15.0 million in 2005, compared to $11.4 million in 2004.  Nipent sales in 2005 included approximately$1.0 million in sales to Europe, compared to $1.5 million in 2004. Unlike ourNipent sales efforts in the U.S. market where we call on clinicians directly,our role in Europe has been limited to that of a supplier. As such, we have nothad a direct influence on Nipent sales at the clinical level, making the timingand magnitude of European sales difficult to predict and dependent on theefforts of our European distributor. During the first quarter of 2004, weacquired the marketing rights for Nipent in Europe, which allows us to charge ahigher unit price for Nipent in Europe compared to the unit prices chargedunder the previous supply agreement.

Development and license revenue relates to our licenseagreement entered into with MGI in September 2004. Development and licenserevenue for 2005 included $9,905,000 related to the amortization of deferredrevenue in connection with the upfront payment received from MGI, and$3,448,000 related to reimbursement of Dacogen development and allocatedoverhead costs. In 2004, we recorded $2,720,000 related to the amortization ofdeferred revenue, $3,646,000 related to the reimbursement of Dacogendevelopment costs, and $12,500,000 related to achievement of certain regulatorymilestones.

Distribution agreement andother revenue for 2005 includes revenue from the termination of our Nipentdistribution agreement with Abbott Laboratories. Upon signing this agreement in1999, we received $5.0 million from Abbott, which was recorded as deferredrevenue and was being amortized over a five-year period. In February 2005,we paid Abbott $1,500,000 to terminate this agreement, and this amount was chargedagainst the unamortized balance of deferred revenue of $1,667,000. Theremaining $167,000 was recorded as distribution agreement revenue in the firstquarter of 2005 as a result of the termination of the distribution agreement. Theremaining $590,000 in revenue relates to the proceeds received from thetransfer agreement with American Pharmaceutical Partners, Inc. whereby wetransferred the ANDA and all rights, title, and interest in our genericdaunorubicin. There were no similar transactions in 2004.

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

 

Cost of product revenue as a percentage of net productrevenue was 19% in 2005 compared to 32% in 2004. The decrease in 2005 is due toa variation in product mix, with a larger portion of our sales being related todomestic Nipent, which is sold at higher margins than mitomycin, and lowerdistribution costs for Nipent since we terminated our Nipent distributionagreement with Abbott in the first quarter of 2005. Current margins may not beindicative of future margins due to possible variations in product mix, averageselling prices, and 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 $3.2 million in 2005 over 2004, and Dacogen, whichdeclined by $1.9 million in 2005 over 2004. These are the result of lowerclinical study expenses and clinical supply costs for Orathecin and Dacogen, asthose clinical studies have wound down after the completion of our FDA andEuropean submissions for both drugs during the latter half of 2004. Inaddition, we had lower personnel costs in 2005 of $2.4 million as a result of areduction in headcount of approximately 16% in the first quarter of 2005.Furthermore, the expenses for 2004 included a $500,000 non-cash charge paid inshares of our common stock to the Stehlin Foundation as a milestone payment forthe acceptance of the submission of the NDA for Orathecin.

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 2005, wehave spent approximately $71.5 million on the Orathecin program. From 2000through 2005, we have spent approximately $12.7 million on the development ofand clinical studies related to Dacogen, and from 1998 through 2005, we havespent approximately $17.0 million on Phase I, II, and Phase IV programsrelated to different indications of Nipent. Conducting clinical trials is alengthy, expensive and uncertain process. Completion of clinical trials maytake several years or more. The length of time generally varies substantiallyaccording to the type, complexity, novelty and intended use of the productcandidate. Our clinical trials may be suspended at any time if we or the FDAbelieve the patients participating in our studies are exposed to unacceptablehealth risks. We may encounter problems in our studies which will cause us orthe FDA to delay or suspend the studies. Because of these uncertainties, wecannot predict when or whether we will successfully complete the development ofour product candidates or the ultimate product development cost.

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

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

 

The increase in 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,and higher interest rates in 2005.

We had no interest expense andamortization of deemed discount on convertible debt  in 2005 as our convertible notes from the February 2003transaction were fully repaid in February 2004 and the notes from June 2004were repaid by December 2004, primarily through the issuance of commonstock.

During 2005, we recorded another than temporary decline in the value of our investment in the stock ofInflazyme Pharmaceuticals. During 2004, we recorded an other than temporarydecline in the value of our investment of the stock of AVI.

The change in derivativevaluation of $282,000 in 2004 represented the change in the valuation of twoderivatives. As part of the June 2003 convertible debt transaction, weissued to the note holders warrants to purchase 2,634,211 shares of AVI at $5.00per share. These warrants represent a derivative instrument and are valued eachquarter using the Black-Scholes pricing model. During 2004, the value of thisderivative had decreased by $3,898,000, which was recorded as other income. Wealso recorded an expense of $3,616,000 related to the derivative accountingtreatment of initially unregistered warrants issued in connection with theprivate placement of shares of our common stock completed in March 2004,in accordance with EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”  In 2005, we recorded a change in value of thederivative associated with the warrants to purchase the AVI shares of $211,000.

***Year ended December 31, 2004 compared with yearended December 31, 2003:***
|                                           | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Revenues**                              | ** ** | ** **                           | ** ** | **2004**   | ** ** | **2003**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| ** **                                |       |                                 |       |       |       |       |       |   |   |
| Net product  revenue                      |       | $                                    | 13,127     |       | $          | 11,437     |       | $ | 1,690 |   | 14.8 | % |
| Development and  license revenue          |       | 18,866                               |       | —     |       | 18,866     |       | — |   |
| Distribution agreement  and other revenue |       | —                               |       | 57         |       | (57        | )          | (100.00 | ) |
|                                           |            |                                      |            |            |            |            |            |  |  |  |  |  |  |  |

 

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. Net sales of Nipent were approximately $11.4 million in 2004,compared to $9.9 million in 2003. Nipent sales in 2004 included approximately$1.5 million in sales to Europe, compared to $315,000 in 2003. Unlike ourNipent sales efforts in the U.S. market where we call on clinicians directly,our role in Europe is currently limited to that of a supplier. As such, we havenot had a direct influence on Nipent sales at the clinical level, making theirtiming and magnitude difficult to predict and dependent on the efforts of ourEuropean distributor.

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Theincrease in development and license revenue relates to our license agreemententered into with MGI in September 2004. Development and license revenueconsisted of $12,500,000 in milestone payments relating to the filing ofDacogen with the FDA and EMEA, $3,646,000 for Dacogen development, and$2,720,000 in amortization of deferred revenue in connection with the upfrontpayment received from MGI.
|                                      | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Costs and  operating expenses**    | ** ** | ** **                           | ** ** | **2004**   | ** ** | **2003**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** | ** ** | ** ** |
| ** **                           |       |                                 |       |       |       |       |       |   |   |
| Cost of product  revenue             |       | $                                    | 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 product revenue as a percentage of net productrevenues was 32% in 2004 compared to 34% in 2003. 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, which declinedby $424,000, offset by increases in clinical trial expenses for Dacogen of$609,000. We substantially completed our Orathecin Phase III studies in 2004and filed an NDA with the FDA in January 2004. Our clinical studies forDacogen continued through 2004, culminating with our filing of an NDA with theFDA and an MAA with the EMEA in late 2004.

Theincrease in selling, general and administrative expenses relates primarily toan increase in sales and marketing expenses of approximately $3.8 million formarket research, speakers programs, advertising placement, and conferences andsymposiums associated with pre-launch activities for Orathecin and Dacogen. Inconnection with our license agreement with MGI we were reimbursed forapproximately $1.0 million of the sales and marketing expenses for Dacogen in2004.
|                                                      | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| **Other income  (expense)**                          | ** ** | ** **                           | ** ** | **2004**   | ** ** | **2003**   | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                           | ** ** | **(dollars 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 two convertible notes executed in February and June 2003.The convertible notes were fully repaid at December 31, 2004, primarilythrough 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.

 

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During2004, we recorded an other than temporary decline in the value of ourinvestment in the stock of AVI. We did not incur any other than temporarydeclines in the value of our investments 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.

**Liquidityand Capital Resources**

Our cash, cashequivalents, and both short and long-term marketable securities totaled $47.8million, compared to $56.8 million at December 31, 2004. In addition,we held 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 market value of$9.3 million at December 31, 2005, and are classified on the balancesheet under non-current Investment in stock of related parties and Restrictedcash and investments.

Net cash used in operatingactivities was $11.7 million in 2005, and consisted primarily of the net lossof $14.5 million, amortization of deferred revenue of $9.9 million from the MGIlicense agreement, payment of $1.5 million to Abbott terminating our Nipentdistribution agreement, and a $1.1 million reduction in accounts payable andother liabilities primarily due to lower research and development relatedactivities as discussed above, offset by decreases in accounts receivable of$11.6 million, due primarily to the receipt of $12.5 million in milestone related payments from MGI in 2005, andinventories of $1.9 million. The net cash used in operating activities in 2004was $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 ofaccounts receivable of $17.2 million, less depreciation of $1.1 million,amortization of prepaid financing costs of $1.8 million, amortization of deemeddiscount on convertible debt of $12.7 million, an other than temporary declinein the value of investments of $7.9 million, and increases in prepaid expensesof $1.0 million, accounts payable of $1.1 million, and deferred revenue of$13.1 million. The net cash used in operating activities in 2003 was$36.6 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.

Net cash provided byinvesting activities was $18.8 million in 2005, and consisted of $29.8 millionin proceeds from the sale or maturities of marketable securities offset by$11.6 million in purchases of marketable securities. Net cash provided byinvesting activities was $131,000 in 2004, which consisted primarily of $28.3million in proceeds from the sales or maturities of marketable securities and$10.7 million cash released from the collateral account, less $37.6 millionused in the purchases of marketable securities and $1.0 million for thepurchase of intangible assets. Net cash used in investing activities in 2003 

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was$5.2 million, which consisted primarily of $10.6 million raised inour June convertible debt transaction that was transferred to a cashcollateral account, and purchases of marketable securities of $8.1 million,offset by sales and maturities of marketable securities of $13.6 million.

Net cash provided byfinancing activities in 2005 was $2.2 million and consisted solely of proceedsfrom the issuance of common stock, net of issuance costs. Net cash provided byfinancing activities was $57.7 million in 2004, which also consisted solely ofproceeds from the issuance of common stock, net of issuance costs. Net cashprovided by financing activities was $39.6 million in 2003, due primarilyto the issuance of a total of $42.5 million in convertible notes inseparate transactions in February and June 2003, offset by thepayment of $3.4 million in prepaid financing costs.

*February 2003 NotesFinancing.**  *OnFebruary 26, 2003 we entered into a Securities Purchase Agreement for theprivate placement of Senior Exchangeable Convertible Notes (“February Notes”)in the principal amount of $21.25 million. 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.In connection 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 NotesFinancing and February Notes Restructuring.**  *On June 24, 2003, we closed a private placementtransaction in which we issued the June Notes, in the aggregate principalamount of $21.25 million, to the same holders of our outstanding February Notes.The June Notes were payable in four equal quarterly installments beginningMarch 31, 2004, and accrued interest at a rate of 4% per year. Pursuant tothe terms of the June Notes, the note holders could elect to convert, atany time prior to maturity, their June Notes into shares of our commonstock at a fixed price of $6.36. We could also elect to 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 theissuance of the June Notes, we restructured our outstanding February Notes.Pursuant to the restructuring, the holders of the February Notes convertedhalf of the principal amount ($10.6 million) plus accrued and unpaid interestthereon into shares of our common stock at the fixed conversion price of $4.25,thereby causing the remaining $10.6 million principal amount of the outstandingFebruary Notes to have a final maturity date of February 26, 2004. Theremaining February Notes were amended to remove the feature permitting theholders to exchange such notes into the AVI shares at an exchange price of $5.00,and to remove our ability to use the AVI shares valued at market at the time ofrepayment to repay the outstanding principal amount.

In addition, in connectionwith the issuance of the June Notes and the restructuring of the February Notes,we issued to the note holders warrants to purchase the 2,634,211 AVI shares atan exercise price of $5.00 per share.

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During the years ended December 31,2004 and 2003, we issued 4.8 million and 3.9 million shares of our commonstock, respectively, in payment of principal and interest on the February andJune Notes. As of December 31, 2004, all principal from both the February Notesand June Notes was repaid.

*March 2004 PrivatePlacement.*   On March 5, 2004, we enteredinto a Securities Purchase Agreement with several investors for the privateplacement of shares of unregistered common stock and warrants. In connectionwith this agreement, we issued 4.9 million shares of our common stock to theinvestors at a per share price of $7.00, for an aggregate purchase amount of$34.3 million, and warrants to purchase 735,000 shares of our common stock. Thewarrants have a term of five years and a per share exercise price of $10.00. Ascompensation to the placement agent, we paid the placement agent $1.7 millionin cash, which was treated as part of the cost of the offering. Net proceedsfrom the offering were $32.5 million.

*Stock Purchase and LicenseAgreements with MGI.**  *InSeptember 2004, we executed a Stock Purchase Agreement and LicenseAgreement with MGI. In accordance with the Stock Purchase Agreement, we issued4 million shares of our common stock to MGI at $10.00 per share, for aggregateproceeds totaling $40.0 million. In connection with this transaction, we paidthe placement agent, The Kriegsman Group, $3.2 million in cash and issuedKriegsman a warrant exercisable for 400,000 shares of our common stock at anexercise price of $10.00 per share.

Ourcontractual obligations as of December 31, 2005 are as follows (inthousands):

| ** **                                                           | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                           | ** ** | **Total**                                 | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Operating leases,  net                                               |       | $                                         | 11,140     |   |   | $ | 2,116 |   |   |   | $ | 6,858 |   |   |   | $2,166 |   |   |   | $ | — |   |   |
| Long term  obligations—contractually obligated research funding |       | 1,050                                     |       |   | 300 |   |   |   | 730 |   |   |   | 20 |   |   |   |   |   |   |
| Total contractual cash  obligations                                  |       | $                                         | 12,190     |   |   | $ | 2,416 |   |   |   | $7,588 |   |   |   | $ | 2,186 |   |   |   | $ | — |   |   |
|                                                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The operating leaseobligations noted above are net of sublease income of $163,000. Thecontractually obligated research funding noted above consists primarily ofrequired payments to Peregrine and Skye Pharma. We are also obligated topotentially spend up to $88.0 million in milestone and development relatedpayments to AVI and Peregrine for development of Avicine and VEGF technologies,respectively. We are unable to determine precisely when and if our paymentobligations under our agreements with AVI and Peregrine will become due asthese obligations are based on milestone events the achievement of which issubject to a significant number of risks and uncertainties. Because some of themilestone events are revenue-related and payment obligation would not betriggered absent our receipt of revenues from the relationship, we may be ableto use funds generated from these relationships to make the milestone payments.

We have financed ouroperations primarily through the issuance of equity and debt securities and thereceipt of milestone payments in connection with collaborative agreements. Webelieve that our current cash, cash equivalents, marketable securities andother investments will satisfy our cash requirements through at least December 31,2006. We may pursue additional financing options, including the selling ofadditional shares of stock in public or private offerings.

We believe that our needfor additional funding will increase in the future, especially if we acquirenew product technologies for development and sale, and our ability to continueraising funds from external sources will be critical to our success. Wecontinue to actively consider future contractual arrangements that wouldrequire significant financial commitments. If we experience currentlyunanticipated cash requirements, we could require additional capital much soonerthan 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 funding 

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throughlicensing and other contractual agreements. Such arrangements may require us torelinquish our rights to our technologies, products or marketing territories,or to grant licenses on terms that are not favorable to us. If we fail toobtain adequate funding in a timely manner, or at all, we will be forced toscale back our product development activities, or our operations in a mannerthat will ensure we can discharge our obligations as they come due in theordinary course of business at least through December 31, 2006.

**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. In December 2002, we became 95% owners ofEuroGen. The remaining 5% is owned by Larry Johnson, the President and CEO ofEuroGen.  The results of EuroGen areincluded in our consolidated operations in Selling, general and administrativeexpenses. During the years ended December 31, 2005, 2004, and 2003, wehave recorded expenses of $3,170,000, $2,269,000 and $325,000, respectively,related to EuroGen.

*KineMed, Inc.*

In November 2001, wemade an equity investment of $150,000 to acquire 100,000 shares of Series AConvertible Preferred stock of KineMed, Inc. (“KineMed”), a start-upbiotech company. In March 2003, we made an additional equity investment of$30,000 to acquire an additional 15,000 shares. The president and chiefexecutive officer of KineMed is a former director of SuperGen. Our currentpresident and chief executive officer is a member of the board of directors ofKineMed. We accounted for this investment under the cost method as ourownership is less than 20% of KineMed’s outstanding shares. At December 31,2004, this investment was included on the balance sheet in Investment in stockof related parties. During 2005, we determined that the value of thisinvestment was impaired due to the uncertain viability of KineMed as a goingconcern. As a result, the entire cost of the investment of $180,000 was chargedto Selling, general, and administrative expense in 2005.

In late 2004, we reachedan agreement with KineMed whereby we granted them exclusive worldwide rights tothe development, manufacture, commercialization and distribution of proprietaryproperty we own relating to etiocholoandeione and etiocholanolone compounds. 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, weentered into an agreement with AVI BioPharma, Inc.  At the time, the chief executive officer ofAVI 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 

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neutralizes the effect of a tumor-associated antigen oncancer cells, while stimulating the body’s immune system to react against theforeign tumor.

In July 2000, wefinalized an agreement with AVI to obtain the U.S. marketing rights for Avicine.We issued 347,826 shares of our common stock along with $5 million in cash toAVI as payment for our investment, in exchange for 1,684,211 shares of AVIcommon stock. As part of this agreement, we obtained the right of firstdiscussion to all of AVI’s oncology compounds and an option to acquire anadditional 10% of AVI’s common stock for $35.625 per share. This option isexercisable for a three-year period commencing on the earlier of the date theFDA accepts the NDA submitted for Avicine or the date on which the closingprice of AVI’s common stock exceeds the option exercise price. We haveaccounted for the investment in AVI under the cost method as our ownership isless than 20% of AVI’s outstanding shares and is classified asavailable-for-sale. No value has been ascribed to the option as neither of themeasurements have been achieved as of December 31, 2005.

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 31,2005, 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 andchief executive officer is a former director and our former president and chiefexecutive officer is currently a director and both are stockholders of QuarkBiotech, Inc. (“QBI”), a privately-held development stage biotechnologycompany. In June 1997, we made an equity investment of $500,000 in QBI’spreferred stock, which represents less than 1% of the company’s outstandingshares as of December 31, 2001. Our investment in QBI is carried at costand is included in “Investment in stock of related parties.”

In January 2002, wesubleased a portion of our laboratory space to QBI. During 2003 we collected$56,000  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 promotional services. In addition, inconnection with such services, on March 22, 2001, we issued three warrantsto The Kriegsman Group, 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 the “C” warrant for the purchase of 100,000 shares of common stockis exercisable at the exercise price of $10.47 per share. 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. No consulting fees were paid to Kriegsman in 2004 or 2005.

In 2004, The Kriegsman Group acted as the placementagent in our stock purchase and license agreements with MGI, 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.

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*FamilyRelationships*

We employ a number ofindividuals who are immediate family members of Dr. Joseph Rubinfeld,  a 5% stockholder and our former president andchief executive officer, who also served as chief scientist and chairmanemeritus during 2004. None of these family members are our officers ordirectors. Dr. Rubinfeld resigned as chief scientist and chairman emeritusin January 2005.

**RecentlyIssued Accounting Standards**

In December 2004,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”), which replaces SFAS 123 and supersedes APB 25. SFAS 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on their fair values. Inaccordance with a SEC rule issued in April 2005, companies will beallowed to implement SFAS 123R as of the beginning of the first interim orannual period that begins after June 15, 2005. Under SFAS 123R, we mustdetermine the appropriate fair value model to be used for valuing share-basedpayments, the amortization method for compensation cost, and the transitionmethod to be used at date of adoption. The permitted transition methods includethe following:

·       A“modified prospective” method in which compensation cost is recognized based onthe requirements of SFAS 123R for all share-based payments granted after theeffective date and based on the requirements of SFAS 123 for all awards grantedto employees prior to the effective date of SFAS 123R that remain unvested onthe effective date.

·       A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits the restatement, based onamounts previously recognized under SFAS 123 for purposes of pro formadisclosures, either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

We will adopt SFAS 123R onJanuary 1, 2006 using the modified prospective method and the BlackScholes valuation model. The pro forma disclosures previously permitted underSFAS 123 no longer will be an alternative to financial statement recognition,and thus our financial results will be negatively affected by the adoption ofthis standard beginning in 2006, although it will have no cash impact on ouroverall financial position. The impact of adoption of SFAS 123R is expected tobe material to our financial statements; however, the actual expense may not becomparable to the amount in the pro forma disclosures because it will depend onlevels of share-based payments granted in the future, and the assumptions usedto value the share-based payments.

**Income Taxes**

As of December 31,2005, we have net operating loss carryforwards for federal income tax purposesof approximately $305 million which expire in the years 2006 through 2025, andfederal research and development credit carryforwards of approximately $7.9million, which expire in the years 2018 through 2025.

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.**

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

Our investment policy 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 

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investment grade rating ofA or A-1 or better to minimize credit risk. Although changes in interestrates may affect the fair value of the marketable securities portfolio andcause unrealized gains or losses, such gains or losses would not be realizedunless the investments 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. As of December 31,2005, the value of the derivative had declined to $1.8 million. As the fairvalue of the common stock of AVI has fluctuated significantly in the past twoyears, 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.

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

All information requiredby this item is included on pages F-1 to F-27 in Item 15of Part IV of this Report and is incorporated into this item by reference.

**ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

None.

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

**Evaluation ofDisclosure Controls and Procedures.**

Based on their evaluationas of December 31, 2005, 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’sReport on 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 31,2005. 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, 2005, our internal control overfinancial reporting was effective based on these criteria.

Management’s assessment ofthe effectiveness of our internal control over financial reporting as of December 31,2005 has been audited by Ernst & Young LLP, an independent registeredpublic accounting firm, as stated in their report which is included below.

**Changesin Internal Control over Financial Reporting**

There were no changes in our internal control overfinancial reporting during the quarter ended December 31, 2005 that havematerially affected, or are reasonably likely to materially affect our internalcontrol over financial reporting.

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of Directors and StockholdersSuperGen, Inc.

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting, that SuperGen, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2005, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).SuperGen, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon 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 accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely 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, 2005, 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, 2005, 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, 2005 and 2004, and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for each of the three years in the period ended December 31, 2005 ofSuperGen, Inc. and our report dated March 13, 2006 expressed anunqualified opinion thereon.

|  | /s/ Ernst & Young LLP |
|--|--------------------------------|

 

Palo Alto, CaliforniaMarch 13, 2006

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**ITEM 9B. OTHER INFORMATION.**

**None**

**PART III**

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT.**

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 28, 2006 (the “ProxyStatement”).

The names of our executiveofficers and their ages, titles and biographies as of March 10, 2006 areset forth below.

**Executive Officers**

| **Name**                   | ** ** | ** ** | ** ** | **Age** | ** ** | **Position**                                     | ** ** | ** ** | ** ** |
|----------------------------|------------|------------|------------|---------|------------|--------------------------------------------------|------------|------------|------------|
| James S. J.  Manuso, Ph.D. |       |       | 57         |    |       | President,  Chief Executive Officer and Director |       |
| Edward L. Jacobs           |       |       | 59         |    |       | Chief  Operating Officer                         |       |
| Audrey  Jakubowski, Ph.D.  |       |       | 63         |    |       | Chief  Regulatory and Quality Officer            |       |
| Michael Molkentin          |       |       | 51         |    |       | Chief Financial Officer                          |       |

 

*JamesS.J. Manuso, Ph.D.,* has served as our president andchief executive officer since January 1, 2004, as our chief executiveofficer-elect from September 2003 to December 2003 and as adirector since February 2001. Dr. Manuso is co-founder and immediatepast president and chief executive officer of Galenica Pharmaceuticals, Inc.Dr. Manuso co-founded and was general partner of PrimeTech Partners, abiotechnology venture management partnership, from 1998 to 2002, and ManagingGeneral Partner of The Channel Group LLC, an international life sciencescorporate advisory firm. He was also president of Manuso, Alexander &Associates, Inc., management consultants and financial advisors topharmaceutical and biotechnology companies. He currently serves on the board ofprivately-held KineMed, Inc. Previously, he served on the boards ofInflazyme Pharmaceuticals, Inc., Symbiontics, Inc., Quark Biotech, Inc.,Galenica Pharmaceuticals, Inc., and Supratek Pharma, Inc. Dr. Manusoearned a B.A. with Honors in Economics and Chemistry from New York University,a Ph.D. in Experimental Psychophysiology from the Graduate Faculty of The NewSchool University, a Certificate in Health Systems Management from HarvardBusiness School, and an Executive M.B.A. from Columbia Business School.Dr. Manuso is the author of over 30 chapters, articles and books on topicsincluding health care cost containment and biotechnology company management. Hehas taught and lectured at Columbia, New York University, Georgetown,Polytechnic University, and Waseda University (Japan). He has delivered invitedaddresses at meetings of the American Management Association, the AmericanMedical Association, the Securities Industry Association, the BiotechnologyIndustry Organization, and many other professional associations.

*EdwardL. Jacobs* rejoined us in October 2001 as chiefbusiness officer and chief financial officer, and in October 2003 becameour 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, 

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business director ofPharmacia Corp., The Upjohn Company (Adria Labs, Inc.) and Johnson &Johnson (McNeil). Mr. Jacobs received a B.A. in PoliticalScience/Journalism from California State University at Northridge.

*AudreyJakubowski, Ph.D.,*joined us as vice president,regulatory affairs in August 1998 and served in that capacity until October 2003when she became senior vice president, regulatory affairs. In January 2004,she was also given responsibility for quality assurance and was named ChiefRegulatory and Quality Officer. Prior to joining us, Dr. Jakubowski wasvice president, regulatory affairs and quality at Systemix, Inc. from June 1996to July 1998. From October 1989 through June 1996, Dr. Jakubowskiwas executive director and then vice president of worldwide regulatory affairsfor The 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 SetonHill College.

*Michael Molkentin*joined us as chief financial officer and corporate secretary in October 2003.Prior to joining us, Mr. Molkentin served as interim chief financialofficer at Aradigm 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.

**Audit Committee Financial 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.

**Corporate Governance 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.

64

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**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS.**

Information regardingsecurity ownership of certain beneficial owners and management is incorporatedby reference to the information set forth under the caption “Voting Securitiesof Principal Stockholders and Management” in the Proxy Statement. Informationregarding our Equity Compensation Plans may be found in Part II, Item 5 ofthis report.

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.**

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.

65

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**PART IV**

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

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

1.     *All Financial Statements:*

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

3.     *Exhibits:*

| Exhibit   Number | ** ** | **Description of Document**                                                                                                                            |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| (f)3.1           |       | Amended and Restated Certificate of Incorporation of  the Registrant.                                                                                  |
| (ff)3.2          |       | Bylaws of the Registrant, as amended and restated  through May 30, 2001.                                                                          |
| (m)4.1           |       | Specimen Common Stock Certificate.                                                                                                                     |
| (l)10.1          |       | Form of Indemnification Agreement between the  Registrant and each of its directors and officers.                                                 |
| (**)(cc)10.2     |       | 1993 Stock Option Plan (as amended through  July 11, 2000).                                                                                       |
| (**) (i)10.3     |       | Forms of stock option agreements under the 1993  Stock Option Plan.                                                                                    |
| (**)(n)10.4      |       | 1996 Directors’ Stock Option Plan, as amended  effective February 7, 2001.                                                                   |
| (**)(t)10.5      |       | 2003 Stock Plan, as amended effective March 10,  2005.                                                                                            |
| (**)(s)10.6      |       | 1998 Employee Stock Purchase Plan, as amended  effective March 1, 2004.                                                                           |
| (*)(b)10.7       |       | Patent License and Royalty Agreement dated  August 30, 1993 between the Registrant and The Jackson Laboratory.                                    |
| (*)(b)10.8       |       | Worldwide License Agreement dated March 1, 1994  between the Registrant and Janssen Biotech, N.V.                                                 |
| (*)(b)10.9       |       | Patent License Agreement dated March 1, 1994  between the Registrant and Cyclex Inc.                                                              |
| (*)(b)10.10      |       | Patent License and Royalty Agreement dated  November 15, 1993 between the Registrant and The Long Island Jewish  Medical Center.                  |
| (*)(b)10.11      |       | License Agreement dated February 1, 1995  between the Registrant and Pharmos Corporation.                                                         |
| (*)(u)10.12      |       | Know-How Transfer and Cooperation Agreement dated  September 10, 1999 between the Registrant and Pharmachemie B.V.                                |
| (**)(a)10.13     |       | Executive Employment and Confidential Information  and Invention Assignment Agreement dated January 1, 2004 between  Registrant and James Manuso. |
| (f)10.14         |       | Office Building Lease dated June 23, 2000  between the Registrant and Koll Dublin Corporate Center, L.P.                                          |

66

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| (d)10.15     |   | Purchase and Sale Agreement dated as of  September 30, 1996 between the Registrant and Warner-Lambert  Company, a Delaware corporation.                                                                                                          |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (*)(e)10.16  |   | Asset Purchase Agreement dated January 15, 1997  between the Registrant and Immunex Corporation, a Washington corporation.                                                                                                                       |
| (*)(x)10.17  |   | Drug Substance Validation and Supply Agreement dated  July 2, 2003.                                                                                                                                                                              |
| (*)(g)10.18  |   | License Agreement between Inflazyme Pharmaceuticals  Ltd. and the Registrant dated April 11, 1997.                                                                                                                                               |
| (*)(g)10.19  |   | Nonexclusive Supply Agreement between the Registrant  and Yunnan Hande Technological Development Co. Ltd. dated May 7, 1997.                                                                                                                     |
| (h)10.20     |   | Convertible Secured Note, Option and Warrant  Purchase Agreement dated June 17, 1997 among the Registrant, Tako  Ventures, LLC and, solely as to Sections 5.3 and 5.5 thereof, Lawrence J.  Ellison (the “Tako Purchase Agreement”).   |
| (r)10.21     |   | Amendment No. 1 to the Tako Purchase Agreement  dated March 17, 1999.                                                                                                                                                                       |
| (r)10.22     |   | Stock Purchase Agreement between the Registrant and  Tako dated January 29, 1999.                                                                                                                                                                |
| (*)(j)10.23  |   | License Agreement between Stehlin Foundation for  Cancer Research and the Registrant dated September 3, 1997.                                                                                                                                    |
| (*)(ee)10.24 |   | Amendment No. 1 to License Agreement dated  November 1, 1999 between the Registrant and the Stehlin Foundation for  Cancer Research.                                                                                                        |
| (*)(k)10.25  |   | Supply Agreement dated October 20, 1997 between  the Registrant and Warner-Lambert Company.                                                                                                                                                      |
| (o)10.26     |   | Agreement and Plan of Reorganization by and among  the Registrant, Royale Acquisition Corp., and Sparta  Pharmaceuticals, Inc. dated January 18, 1999.                                                                                      |
| (w)10.27     |   | First Amendment to Agreement and Plan of Reorganization  by and among the Registrant, Royale Acquisition Corp. and Sparta  Pharmaceuticals, Inc. dated May 15, 1999.                                                                        |
| (r)10.28     |   | Standard Industrial/Commercial Multi-Tenant  Lease dated February 12, 1999 between the Registrant and Sea Cliff  Properties, a California general partnership (for the premises at 1075  Serpentine Lane, Pleasanton, California, Suite A). |
| (r)10.29     |   | Standard Industrial/Commercial Multi-Tenant  Lease dated February 12, 1999 between the Registrant and Sea Cliff  Properties, a California general partnership (for the premises at 1075  Serpentine Lane, Pleasanton, California, Suite B). |
| (*)(z)10.30  |   | U.S. Distribution Agreement, Dated December 21,  1999 between the Registrant and Abbott Laboratories.                                                                                                                                            |
| (aa)10.31    |   | Registration Rights Agreement dated December 15,  1999 between the Registrant and AVI BioPharma, Inc.                                                                                                                                       |
| (aa)10.32    |   | Subscription Agreement dated  December 1, 1999 between the Registrant and AVI  BioPharma, Inc.                                                                                                                                         |
| (ee)10.33    |   | Common Stock and Warrant Purchase Agreement dated  April 4, 2000 between the Registrant and AVI BioPharma, Inc.                                                                                                                             |
| (ee)10.34    |   | United States of America Sales, Distribution, and  Development Agreement dated April 4, 2000 between the Registrant and AVI  BioPharma, Inc.                                                                                                |
| (dd)10.35    |   | Registration Rights Agreement dated April 4,  2000 between the registrant and AVI BioPharma, Inc.                                                                                                                                           |
| (ee)10.36    |   | Asset Purchase Agreement dated February 18,  2000 between the Registrant and AMUR Pharmaceuticals, Inc.                                                                                                                                     |
| (ee)10.37    |   | Patent and Intellectual Property Assignment  Agreement dated September 27, 2000 between the Registrant and AMUR  Pharmaceuticals, Inc.                                                                                                      |
| (*)(gg)10.38 |   | Supply and Distribution Agreement dated  September 21, 2001 between the Registrant and EuroGen Pharmaceuticals  Ltd.                                                                                                                             |

67

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| (hh)10.39   |   | Termination and Release Agreement dated  March 4, 2002 between the Registrant and Abbott Laboratories.                                                                              |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)10.40   |   | Securities Purchase Agreement dated  September 23, 2002 by and between the Registrant and the purchasers  named therein.                                                            |
| (ii)10.41   |   | Registration Rights Agreement dated  September 23, 2002 by and between the Registrant and the purchasers  named therein.                                                            |
| (ii)10.42   |   | Form of Warrant dated September 24, 2002  issued to the purchasers under the Securities Purchase Agreement dated  September 23, 2002.                                     |
| (ii)10.43   |   | Warrant dated September 24, 2002 issued Paul  Revere LLC.                                                                                                                           |
| (jj)10.44   |   | Registration Rights Agreement dated March 22,  2001 by and between the Registrant and The Kriegsman Group.                                                                          |
| (jj)10.45   |   | Warrant A Agreement dated March 22, 2001 by and  between the Registrant and The Kriegsman Group.                                                                                    |
| (bb)10.46   |   | Securities Purchase Agreement dated  February 26, 2003 by and among the Registrant and the purchasers named  therein.                                                               |
| (bb)10.47   |   | Form of Senior Exchangeable/Convertible Note  dated February 26, 2003 issued to the purchasers under the Securities  Purchase Agreement dated February 26, 2003.          |
| (bb)10.48   |   | Registration Rights Agreement dated  February 26, 2003 by and among the Registrant and the purchasers named  therein.                                                               |
| (bb)10.49   |   | Form of Warrant dated February 26, 2003  issued to the purchasers under the Securities Purchase Agreement dated  February 26, 2003.                                       |
| (bb)10.50   |   | Pledge Agreement dated February 26, 2003  executed by the Registrant in favor of the purchasers under the Securities  Purchase Agreement dated February 26, 2003.              |
| (bb)10.51   |   | Securities Account Control Agreement dated February 26,  2003 by and among the Registrant, the purchasers named therein, and Mellon  Investor Services LLC.                         |
| (*)(m)10.52 |   | License Agreement dated February 13, 2001  between the Registrant and Peregrine Pharmaceuticals, Inc.                                                                          |
| (y)10.53    |   | Securities Purchase Agreement dated June 24,  2003 by and among the Registrant and the purchasers named therein.                                                                    |
| (y)10.54    |   | Form of Senior Convertible Note dated  June 24, 2003 issued to the purchasers under the Securities Purchase  Agreement dated June 24, 2003.                               |
| (y)10.55    |   | Registration Rights Agreement dated June 24,  2003 by and among the Registrant and the purchasers named therein.                                                                    |
| (y)10.56    |   | Form of Warrant dated June 24, 2003 issued  to the purchasers under the Securities Purchase Agreement dated June 24,  2003.                                               |
| (y)10.57    |   | Amended and Restated Pledge Agreement dated  June 24, 2003 executed by the Registrant in favor of the purchasers  under the Securities Purchase Agreement dated June 24, 2003. |
| (y)10.58    |   | Amended and Restated Securities Account Control  Agreement dated June 24, 2003 by and among the Registrant, the  purchasers named therein and Mellon Investor Services LLC.         |
| (y)10.59    |   | Collateral Account Agreement dated June 24,  2003.                                                                                                                                  |
| (y)10.60    |   | Conversion and Amendment Agreement dated  June 24, 2003.                                                                                                                            |
| (y)10.61    |   | Amended and Restated Convertible Notes dated  June 24, 2003.                                                                                                                        |
| (c)10.62    |   | Securities Purchase Agreement dated as of  March 5, 2004 by and among the Registrant and the purchasers named  therein.                                                             |
| (c)10.63    |   | Registration Rights Agreement dated as of  March 5, 2004 by and among the Registrant and the purchasers named  therein.                                                             |

68

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| (c)10.64    |   | Form of Warrant dated as of March 5, 2004  for issuance under the Securities Purchase Agreement dated March 5, 2004  by and among the Registrant and the purchasers named therein. |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (*)(p)10.65 |   | Purchase and Sale Agreement dated February 17,  2004 between the Registrant and Pfizer Inc.                                                                                                  |
| (*)(q)10.66 |   | Amended and Restated License Agreement effective  September 21, 2004 between the Registrant and MGI PHARMA, Inc.                                                                        |
| (q)10.67    |   | Common Stock Purchase Agreement dated  August 31, 2004 between the Registrant and MGI PHARMA, Inc.                                                                                      |
| (q)10.68    |   | Investor Rights Agreement dated August 31, 2004  between the Registrant and MGI PHARMA, Inc.                                                                                            |
| (q)10.69    |   | Warrant dated September 22, 2004 issued to The  Kriegsman Group.                                                                                                                             |
| 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 treatmenthas been previously granted for certain portions of these exhibits.

(**)   Indicates a management contractor compensatory plan or arrangement.

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

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

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

(d)          Incorporated byreference from the Registrant’s Report on Form 8-K filed with theSecurities and Exchange Commission on October 15, 1996.

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

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

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

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

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

69

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(j)              Incorporated byreference from Amendment No. 2 on Form S-3 to the Registrant’sRegistration Statement on Form SB-2 (Reg. No. 333-476-LA)filed with the Securities and Exchange Commission on October 6, 1997.

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

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

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

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

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

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

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

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

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

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

(u)          Incorporated byreference from the Registrant’s Report on Form  10-Q filed with theSecurities and Exchange Commission on November 15, 1999.

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

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

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

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

(z)           Incorporated byreference 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 referencefrom 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 fromthe Registrant’s Report on Form 8-K dated February 26, 2003 filedwith the Securities and Exchange Commission on February 27, 2003.

70

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(cc)     Incorporated by referencefrom 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 fromthe 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 referencefrom the Registrant’s Report on Form 10-K filed with the Securitiesand Exchange Commission on March 23, 2001.

(ff)         Incorporated by referencefrom the Registrant’s Report on Form 10-Q filed with the Securitiesand Exchange Commission on August 14, 2001.

(gg)     Incorporated by referencefrom the Registrant’s Report on Form  10-Q filed with the Securitiesand Exchange Commission on November 14, 2001.

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

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

(b)   *Exhibits.  *See Item 15(a) above.

(c)   *Financial Statement Schedules.  *See Item 15(a) above.

71

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of Directors and StockholdersSuperGen, Inc.

We have audited the accompanying consolidated balancesheets of SuperGen, Inc. as of December 31, 2005 and 2004, and therelated consolidated statements of operations, changes in stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2005. 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, 2005 and 2004 and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2005, in conformity with U.S.generally accepted accounting principles.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of SuperGen, Inc.’sinternal control over financial reporting as of December 31, 2005, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 13, 2006 expressed an unqualified opinion thereon.
|  |   | /s/ Ernst & Young  LLP |
|--|--------|---------------------------------|

 

Palo Alto, CaliforniaMarch 13, 2006

F-1

----

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

| ** **                                                                                                                                                               | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                               | ** ** |
| Current assets:                                                                                                                                                          |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                |       | $                     | 47,664     |   | $ | 38,394 |   |
| Marketable securities                                                                                                                                                    |       | —                |       | 18,235 |   |
| Accounts receivable, net                                                                                                                                                 |       | 5,576                 |       | 4,926 |   |
| Development revenue receivable from MGI PHARMA, Inc                                                                                                                      |       | 550                   |       | 12,809 |   |
| Inventories                                                                                                                                                              |       | 1,439                 |       | 3,306 |   |
| Prepaid expenses and other current assets                                                                                                                                |       | 1,407                 |       | 1,403 |   |
| Total current assets                                                                                                                                                     |       | 56,636                |       | 79,073 |   |
| Marketable  securities, non-current                                                                                                                                      |       | 147                   |       | 188 |   |
| Investment in  stock of related parties                                                                                                                                  |       | 673                   |       | 798 |   |
| Due from related  parties, non-current                                                                                                                                   |       | 52                    |       | 93 |   |
| Property, plant  and equipment, net                                                                                                                                      |       | 2,907                 |       | 3,635 |   |
| Goodwill                                                                                                                                                                 |       | 731                   |       | 731 |   |
| Other  intangibles, net                                                                                                                                                  |       | 290                   |       | 677 |   |
| Restricted cash  and investments, non-current                                                                                                                            |       | 11,805                |       | 9,432 |   |
| Other assets                                                                                                                                                             |       | 30                    |       | 30 |   |
| Total assets                                                                                                                                                             |       | $                     | 73,271     |   | $ | 94,657 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                            | ** ** |
| Current  liabilities:                                                                                                                                                    |       |                  |       |   |   |
| Accounts payable and accrued liabilities                                                                                                                                 |       | $                     | 3,391      |   | $ | 4,644 |   |
| Derivative liability                                                                                                                                                     |       | 1,817                 |       | 1,607 |   |
| Payable to AVI BioPharma, Inc.                                                                                                                                      |       | 565                   |       | 565 |   |
| Deferred revenue                                                                                                                                                         |       | —                |       | 11,572 |   |
| Accrued payroll and employee benefits                                                                                                                                    |       | 2,269                 |       | 2,129 |   |
| Total current liabilities                                                                                                                                                |       | 8,042                 |       | 20,517 |   |
| Deferred rent.                                                                                                                                                           |       | 972                   |       | 927 |   |
| Total liabilities                                                                                                                                                        |       | 9,014                 |       | 21,444 |   |
| 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; 51,710,912 and 51,127,314 shares issued and outstanding at December 31,  2005 and 2004, respectively |       | 52                    |       | 51 |   |
| Additional paid in capital                                                                                                                                               |       | 409,365               |       | 406,789 |   |
| Accumulated other comprehensive gain (loss)                                                                                                                              |       | 2,850                 |       | (99 | ) |
| Accumulated deficit                                                                                                                                                      |       | (348,010              | )          | (333,528 | ) |
| Total stockholders’ equity                                                                                                                                          |       | 64,257                |       | 73,213 |   |
| Total liabilities  and stockholders’ equity                                                                                                                         |       | $                     | 73,271     |   | $ | 94,657 |   |

 

See accompanying notes to consolidated financial statements

F-2

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

| ** **                                                                               | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                                |       |                                       |       |   |   |   |   |
| Net product revenue                                                                      |       | $                                          | 16,059     |   | $ | 13,127 |   | $ | 11,437 |   |
| Development and license revenue from MGI PHARMA,  Inc.                                   |       | 13,353                                     |       | 18,866 |   | — |   |
| Distribution agreement and other revenue                                                 |       | 757                                        |       | — |   | 57 |   |
| Total revenues                                                                           |       | 30,169                                     |       | 31,993 |   | 11,494 |   |
| Costs and operating  expenses:                                                           |       |                                       |       |   |   |   |   |
| Cost of product revenue                                                                  |       | 3,051                                      |       | 4,135 |   | 3,865 |   |
| Research and development                                                                 |       | 15,059                                     |       | 23,978 |   | 26,312 |   |
| Selling, general, and administrative                                                     |       | 28,046                                     |       | 28,800 |   | 24,436 |   |
| Total costs and operating expenses                                                       |       | 46,156                                     |       | 56,913 |   | 54,613 |   |
| Loss from  operations                                                                    |       | (15,987                                    | )          | (24,920 | ) | (43,119 | ) |
| Interest income                                                                          |       | 1,727                                      |       | 624 |   | 474 |   |
| 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                                    |       | (11                                        | )          | (7,851 | ) | — |   |
| Change in  valuation of derivatives                                                      |       | (211                                       | )          | 282 |   | 6,894 |   |
| Net loss                                                                                 |       | $                                          | (14,482    | ) | $ | (46,860 | ) | $ | (53,470 | ) |
| Basic and diluted  net loss per common share                                             |       | $                                          | (0.28      | ) | $ | (1.04 | ) | $ | (1.56 | ) |
| Weighted average shares  used in basic and diluted net loss per common share calculation |       | 51,309                                     |       | 44,953 |   | 34,276 |   |

 

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, 2003                                                                           |       |                  | 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         |              |       |                 | 406,789    |        |       |       | —     |   |   |   | (99 | ) |   |   | (333,528 | ) |   | 73,213 |   |
| Comprehensive loss:                                                                                         |       |                  |       |             |       |           |       |              |       |                 |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                    |       |                  | —     |             |       |           | —     |              |       |                 | —     |        |       |       | —     |   |   |   | — |   |   |   | (14,482 | ) |   | (14,482 | ) |
| Other than  temporary decline in value of investments                                                       |       |                  | —     |             |       |           | —     |              |       |                 | —     |        |       |       | —     |   |   |   | 11 |   |   |   | — |   |   | 11 |   |
| Other  comprehensive loss—Change in unrealized gain (loss) on investments                              |       |                  | —     |             |       |           | —     |              |       |                 | —     |        |       |       | —     |   |   |   | 2,938 |   |   |   | — |   |   | 2,938 |   |
| Comprehensive loss                                                                                          |       |                  |       |             |       |           |       |              |       |                 |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   | (11,533 | ) |
| Issuance of common  stock upon exercise of stock options                                               |       |                  | 273        |             |       |           | 1          |              |       |                 | 924        |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 925 |   |
| Issuance of common  stock in connection with employee stock purchase plan                                   |       |                  | 52         |             |       |           | —     |              |       |                 | 205        |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 205 |   |
| Issuance of common  stock upon exercise of  warrants                                                        |       |                  | 259        |             |       |           | —     |              |       |                 | 1,047      |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 1,047 |   |
| Compensation  expense from stock option grants to consultants                                               |       |                  | —     |             |       |           | —     |              |       |                 | 132        |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 132 |   |
| Compensation  expense related to acceleration of stock option grants                                        |       |                  | —     |             |       |           | —     |              |       |                 | 268        |        |       |       | —     |   |   |   | — |   |   |   | — |   |   | 268 |   |
| Balances at  December 31, 2005                                                                         |       |                  | 51,711     |             |       |           | $          | 52                |       |                 |       | $           | 409,365    |       |       |   | $ | — |   |   |   | $ | 2,850 |   |   |   | $ | (348,010 | ) |   | $ | 64,257 |   |

 

See accompanying notes to consolidated financial statements

F-4

----

**S****UPERGEN, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                                        | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating activities:                                                                             |       |                                       |       |   |   |   |   |
| Net loss                                                                                          |       | $                                          | (14,482    | ) | $ | (46,860 | ) | $ | (53,470 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities:                      |       |                                       |       |   |   |   |   |
| Depreciation                                                                                      |       | 834                                        |       | 1,058 |   | 1,191 |   |
| Amortization of prepaid financing costs                                                           |       | —                                     |       | 1,811 |   | 3,064 |   |
| Amortization of intangible assets                                                                 |       | 387                                        |       | 799 |   | 537 |   |
| Amortization of deferred compensation                                                             |       | —                                     |       | — |   | 6 |   |
| Amortization of deemed discount on convertible debt                                               |       | —                                     |       | 12,657 |   | 13,738 |   |
| Amortization of deferred revenue                                                                  |       | (9,905                                     | )          | (2,720 | ) | — |   |
| Interest on convertible debt paid in common stock                                                 |       | —                                     |       | 543 |   | 460 |   |
| Change in valuation of derivatives                                                                |       | 211                                        |       | (282 | ) | (6,894 | ) |
| Other than temporary decline in value of investments                                              |       | 11                                         |       | 7,851 |   | — |   |
| Stock compensation for modification of employee  options                                          |       | 268                                        |       | 654 |   | 1,493 |   |
| Expense related to stock options and warrants granted  to non-employees                           |       | 132                                        |       | 200 |   | 250 |   |
| Milestone, license, and research payments made in  common stock                                   |       | —                                     |       | 700 |   | 200 |   |
| Write-off of investment in private company                                                        |       | 180                                        |       | — |   | 250 |   |
| Cash option paid in termination of distribution  agreement                                        |       | (1,500                                     | )          | — |   | (500 | ) |
| Changes in operating assets and liabilities:                                                      |       |                                       |       |   |   |   |   |
| Accounts receivable and development revenue  receivable                                           |       | 11,609                                     |       | (17,228 | ) | 4,898 |   |
| Inventories                                                                                       |       | 1,867                                      |       | 659 |   | (1,799 | ) |
| Prepaid expenses and other assets                                                                 |       | (4                                         | )          | 1,030 |   | (521 | ) |
| Due from related parties                                                                          |       | 41                                         |       | 344 |   | 355 |   |
| Restricted cash and investments                                                                   |       | (73                                        | )          | (36 | ) | 229 |   |
| Accounts payable and other liabilities                                                            |       | (1,068                                     | )          | 1,141 |   | (40 | ) |
| Deferred revenue                                                                                  |       | (167                                       | )          | 13,138 |   | — |   |
| Net cash used in  operating activities                                                            |       | (11,659                                    | )          | (24,541 | ) | (36,553 | ) |
| Investing  activities:                                                                            |       |                                       |       |   |   |   |   |
| Purchases of marketable securities                                                                |       | (11,585                                    | )          | (37,612 | ) | (8,056 | ) |
| Sales or maturities of marketable securities                                                      |       | 29,845                                     |       | 28,336 |   | 13,627 |   |
| Purchase of intangible assets                                                                     |       | —                                     |       | (1,000 | ) | — |   |
| Release of restricted cash from collateral account                                                |       | 598                                        |       | 10,680 |   | — |   |
| Proceeds from convertible debt transferred to  restricted cash and investments                    |       | —                                     |       | — |   | (10,625 | ) |
| Purchases of property and equipment                                                               |       | (106                                       | )          | (273 | ) | (168 | ) |
| Net cash provided  by (used in) investing activities                                              |       | 18,752                                     |       | 131 |   | (5,222 | ) |
| Financing  activities:                                                                            |       |                                       |       |   |   |   |   |
| Proceeds from issuance of common stock, net of  issuance costs                                    |       | 2,177                                      |       | 57,749 |   | 1,415 |   |
| Prepaid financing costs                                                                           |       | —                                     |       | — |   | (3,435 | ) |
| Proceeds from issuance of convertible debt                                                        |       | —                                     |       | — |   | 42,500 |   |
| Repurchases of common stock                                                                       |       | —                                     |       | — |   | (891 | ) |
| Net cash provided  by financing activities                                                        |       | 2,177                                      |       | 57,749 |   | 39,589 |   |
| Net increase (decrease)  in cash and cash equivalents                                             |       | 9,270                                      |       | 33,339 |   | (2,186 | ) |
| Cash and cash equivalents  at beginning of period                                                 |       | 38,394                                     |       | 5,055 |   | 7,241 |   |
| Cash and cash  equivalents at end of period                                                       |       | $                                          | 47,664     |   | $ | 38,394 |   | $ | 5,055 |   |
| Supplemental Disclosure of Non-Cash Financing  Activities:                                        |       |                                       |       |   |   |   |   |
| Conversion of convertible notes into common stock                                                 |       | $                                          | —     |   | $ | 26,250 |   | $ | 16,250 |   |
| Beneficial conversion and deemed discount in  connection with convertible debt                    |       | $                                          | —     |   | $ | — |   | $ | 26,395 |   |
| 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 |   | $ | — |   |
| 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 of Business**

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 of Consolidation**

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 of Financial Instruments**

The fair values of ourcash equivalents and marketable securities are based on quoted market prices. Thecarrying values of accounts receivable and accounts payable are considered tobe representative of their respective fair values at December 31, 2005 and2004.

**Revenue Recognition**

Our net product revenues relate principally to twopharmaceutical products, with Nipent sales representing 93% in 2005, 87% in2004, and 85% in 2003. We recognize sales revenue upon shipment, provided thattitle to the products has been transferred at the point of shipment; if titleof product transfers at point of receipt by the customer, revenue is recognizedupon customer receipt of the shipment, and collectibility is reasonablyassured, with allowances provided for bad debt and estimated returns. Beginningin 2005, we have also provided allowances for estimated cash discounts andchargebacks. We record estimated allowances for sales reserves against productrevenues for returns, payment discounts, and chargebacks based on historicalreturn patterns for returns, contractual terms for discounts and chargebacks,and expectations regarding utilization rates for these programs. Actual amountsfor returns and allowances, cash discounts, and chargebacks may differ from ourestimates and such differences could be material to the consolidated financialstatements. The allowances for bad debt and sales returns were $175,000 and$275,000 at December 31, 2005 and 2004, respectively. The provision forthe returns and allowances was $52,000 in 2005, $63,000 in 2004, and $691,000in 2003. The allowances for cash discounts and chargebacks were established in2005 at $120,000 and $500,000, respectively.

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 under collaborativeagreements as the related research and development costs are incurred. Werecognize milestone fees upon completion of 

F-6

----

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

**1. Summaryof Significant Accounting Policies (Continued)**

specified milestones accordingto contract terms. Deferred revenue represents the portion of research paymentsreceived 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 2005, 94% of our net product revenues were made in the UnitedStates and 6% were made in the European Union (“EU”). In 2004, 89% of our netproduct revenues were made in the United States and 11% were made in the EU. In2003, 97% of our net product revenues were made in the United States and 3% inthe EU.

**Advertising Expense**

Advertising costs areexpensed as incurred. We incurred advertising costs of $326,000 in 2005,$424,000 in 2004, and $319,000 in 2003.

**Research and Development**

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

**Cash,Cash Equivalents and Marketable Securities**

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

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

During the year ended December 31,2005, we recorded a write-down of $11,000 related to the other than temporarydecline in the value of our equity investment in Inflazyme Pharmaceuticals. Duringthe year ended December 31, 2004, we recorded a write-down of $7,851,000related to the other than temporary decline in the value of our equityinvestment in AVI BioPharma, Inc. (“AVI”). We had no such write-downs in2003.

**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 

F-7

----

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

**1. Summaryof Significant Accounting Policies (Continued)**

sheet. Weperiodically review those carried at cost and evaluate whether an impairmenthas occurred. During 2005, we determined that the value of investments in stockof a related party made in 2001 and 2003 were impaired due to the uncertainviability of the company as a going concern. As a result, the entire cost ofthe investment of $180,000 was charged to selling, general, and administrativeexpense in 2005. During 2003, we determined that the value of an equityinvestment that we made in 2002 was impaired due to the poor financialcondition of the company. As a result, this investment of $250,000 was chargedto selling, general and administrative expense in 2003. We had no suchwrite-offs in 2004. We believe the remaining equity investments and investmentsin related parties continue to be realizable. The cost of securities sold orthe amount reclassified out of accumulated other comprehensive income or lossinto earnings is based on the specific identification method.

**Restricted Cash and Investments**

Under one of our operatinglease agreements and in connection with certain outstanding warrants, we arerequired to set aside cash and/or investments as collateral. At December 31,2005 and 2004, we had $11,805,000 and $9,432,000, respectively, of restrictedcash and investments related to such agreements.

**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):

| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw materials . |       | $        | 67         |     | $          | 83 |   |
| Work in process |       | 197      |       | 1,040    |       |
| Finished goods  |       | 1,175    |       | 2,183    |       |
|            |       | $        | 1,439      |     | $          | 3,306 |   |

 

Bulk materials for Nipentmust be purified at a United States Food and Drug Administration (“FDA”)approved facility that meets stringent Good Manufacturing Practices standards. Weuse a separate vendor to manufacture the Nipent finished dosage at its approvedfacility, where we also store the majority of our bulk raw materials. Althoughthere are a limited number of vendors who may be qualified to perform theseservices, we believe that other vendors could be engaged to provide similarservices on comparable terms. However, the time required to locate and qualifyother vendors or replace lost bulk inventory could cause a delay inmanufacturing that might be financially and operationally disruptive. The company that had been performing thepurification of Nipent went out of business in late 2004. However, we havecontracted with another manufacturer to purify Nipent and do not anticipate anyinterruptions to our supply of drug available for sale. At December 31,2005, we established a reserve for product obsolescence of $400,000, relatingto the potential expiration of finished goods inventory.

**Property, Plant and Equipment**

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.

F-8

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

**1. Summaryof Significant Accounting Policies (Continued)**

Property, plant andequipment consist of the following at December 31 (in thousands):

| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land and building                               |       | $        | 2,433      |     | $          | 2,433 |   |
| Leasehold  improvements                         |       | 2,611    |       | 2,607    |       |
| Equipment                                       |       | 1,008    |       | 983      |       |
| Furniture and  fixtures .                       |       | 3,674    |       | 3,597    |       |
| Total property  and equipment                   |       | 9,726    |       | 9,620    |       |
| Less accumulated  depreciation and amortization |       | (6,819   | )          | (5,985   | )          |
| Property, plant and  equipment, net             |       | $        | 2,907      |     | $          | 3,635 |   |

 

**Developed Technology**

Developed technologyrelated to the acquisition of Nipent was amortized to cost of sales on a units-manufacturedbasis over a period expected to approximate six years. Developed technologyrelated to other acquired products was amortized on a straight-line basisover five years. Cost basis of the developed technology was $1,936,000 and itwas fully amortized at December 31, 2004.

**Goodwill**

Goodwill and indefinitelived intangible assets are reviewed annually, or more frequently if impairmentindicators arise, for impairment. Intangible assets with finite useful livesare amortized over their respective lives. Goodwill no longer subject toamortization amounted to $731,000 at December 31, 2005 and 2004.

**Intangible Assets**

Intangible assets, including trademarks, covenants notto compete, and customer lists, were recorded at cost and amortized on astraight-line basis over their estimated useful lives of up to five years.Cost basis of these intangible assets was $787,000 and they were fullyamortized at December 31, 2004.

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 was $710,000 and$323,000 at December 31, 2005 and 2004, respectively. We expect to recordamortization of $290,000 in 2006.

**Derivative Financial Instruments**

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

F-9

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

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

**Major Customers**

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

| ** ** | ** ** | **Percentage of product  revenue by customer for  Years ended December 31,** | ** ** | **Percentage  of accounts  receivable by  customer as of  December 31,** | ** ** |
|------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **2005**                                                                                                             | ** ** | **2004**                                                                                     | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Customer A |       |                                                                                                                 | 28         | %                                                                                            |       |   | 27 | % |   |   | 15 | % |   |   | 34 | % |   |   | 27 | % |   |
| Customer B |       |                                                                                                                 | 19         |                                                                                         |       |   | * |   |   |   | * |   |   |   | * |   |   |   | 14 |   |   |
| Customer C |       |                                                                                                                 | 14         |                                                                                         |       |   | * |   |   |   | * |   |   |   | 18 |   |   |   | * |   |   |
| Customer D |       |                                                                                                                 | 11         |                                                                                         |       |   | * |   |   |   | * |   |   |   | * |   |   |   | * |   |   |
| Customer E |       |                                                                                                                 | *          |                                                                                         |       |   | 21 |   |   |   | 38 |   |   |   | 27 |   |   |   | 30 |   |   |
| Customer F |       |                                                                                                                 | *          |                                                                                         |       |   | 12 |   |   |   | * |   |   |   | * |   |   |   | * |   |   |

 

----

* Less than 10%

**Net Loss per Common Share**

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

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

| ** **                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Options to  purchase common stock                            |       | 6,550    |       | 6,502    |       | 5,326    |       |
| Warrants to purchase  common stock                           |       | 6,924    |       | 7,183    |       | 6,835    |       |
| Shares issuable upon  conversion of senior convertible notes |       | —   |       | —   |       | 4,516    |       |

 

**Stock-Based Compensation**

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 intrinsic value on the date of the grant, whichrepresents the difference, if any, between the fair value of the stock and theexercise price of the option.

F-10

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

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

We account for stock issued tonon-employees using the fair value approach, in accordance with the provisionsof SFAS 123 and EITF No. 96-18*,*“Accountingfor Equity Instruments That are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services.”

Underthe intrinsic value method, when the exercise price of our employee stockoptions equals the market price of the underlying stock on the date of grant,no compensation expense is recognized. The following table illustrates the proforma effect on net loss and loss per share for the years ended December 31,2005, 2004, and 2003  had we applied thefair value method to account for stock-based awards to employees (in thousands,except per share amounts):

| ** **                                                                                                                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net loss, as  reported                                                                                                                                                      |       | $        | (14,482    | )        | $          | (46,860  | )          | $ | (53,470 | ) |
| Add: Stock-based  employee compensation expense included in the determination of net loss, as  reported.                                                                    |       | 268      |       | 654      |       | 1,499    |       |
| 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 |       | (5,718   | )          | (8,266   | )          | (5,901   | )          |
| Pro forma net  loss.                                                                                                                                                        |       | $        | (19,932    | )        | $          | (54,472  | )          | $ | (57,872 | ) |
| Basic and diluted  net loss per common share:                                                                                                                               |       |     |       |     |       |     |       |
| As reported                                                                                                                                                                 |       | $        | (0.28      | )        | $          | (1.04    | )          | $ | (1.56 | ) |
| Pro forma                                                                                                                                                                   |       | $        | (0.39      | )        | $          | (1.21    | )          | $ | (1.69 | ) |

 

**Impairment of Long-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 existedas of December 31, 2005.

**Recent Accounting Pronouncements**

In December 2004,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”), which replaces SFAS 123 and supersedes APB 25. SFAS 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on their fair values. Inaccordance with a Securities and Exchange Commission (“SEC”) rule issuedin April 2005, companies will be allowed to implement SFAS 123R as of thebeginning of the first interim or annual period that begins after June 15,2005. Under SFAS 123R, we must determine the appropriate fair value model to beused for valuing share-based payments, the amortization method for compensationcost, and the transition method to be used at date of adoption. The permittedtransition methods include the following:

·       A“modified prospective” method in which compensation cost is recognized based onthe requirements of SFAS 123R for all share-based payments granted after theeffective date and based on the requirements of SFAS 123 for all awards grantedto employees prior to the effective date of SFAS 123R that remain unvested onthe effective date.

F-11

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

**1. Summaryof Significant Accounting Policies (Continued)**

·       A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits the restatement, based onamounts previously recognized under SFAS 123 for purposes of pro formadisclosures, either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

We will adopt SFAS 123R onJanuary 1, 2006 using the modified prospective method and the BlackScholes valuation model. The pro forma disclosures previously permitted underSFAS 123 no longer will be an alternative to financial statement recognition,and thus our financial results will be negatively affected by the adoption ofthis standard beginning in 2006, although it will have no cash impact on ouroverall financial position. The impact of adoption of SFAS 123R is expected tobe material to our financial statements; however, the actual expense may not becomparable to the amount in the pro forma disclosures because it will depend onlevels of share-based payments granted in the future, and the assumptions usedto value the share-based payments.

**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, 2005**   |       |                |       |                         |       |                          |       |            |       |   |   |   |   |   |   |
| U.S. corporate  debt securities  |       |                | $          | 44,681                       |       |                          |       | $               | 9          |   |   |   | $ | — |   |   | $ | 44,690 |   |
| Marketable equity  securities    |       |                | 6,566      |                         |       |                          | 2,841      |            |       |   | — |   |   | 9,407 |   |
| Total                            |       |                | $          | 51,247                       |       |                          |       | $               | 2,850      |   |   |   | $ | — |   |   | $ | 54,097 |   |
| **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 |   |

 

F-12

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

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

The available-for-salesecurities are classified on the balance sheet as follows (in thousands):

| ** **                                                     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| **At  December 31, 2005**                                 |       |                |       |                         |       |                          |       |            |       |   |   |   |   |   |   |
| Amounts included  in cash and cash equivalents                 |       |                | $          | 44,681                       |       |                          |       | $               | 9          |   |   |   | $ | — |   |   | $ | 44,690 |   |
| Amounts included  in investment in stock of related  parties . |       |                | 120        |                         |       |                          | 52         |            |       |   | — |   |   | 172 |   |
| Amounts included  in restricted cash and investments.          |       |                | 6,322      |                         |       |                          | 2,766      |            |       |   | — |   |   | 9,088 |   |
| Marketable  securities, non-current                            |       |                | 124        |                         |       |                          | 23         |            |       |   | — |   |   | 147 |   |
| Total                                                          |       |                | $          | 51,247                       |       |                          |       | $               | 2,850      |   |   |   | $ | — |   |   | $ | 54,097 |   |
| **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 |   |

 

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

| ** **                               | ** ** | **Fair Value** | ** ** |
|------------------------------------------|------------|---------------------|------------|
| ** **                               | ** ** | **2005**            | ** ** | **2004** | ** ** |
| Debt securities  due in one year or less |       | $                   | 44,690     |   | $ | 51,939 |   |
| Marketable equity  securities            |       | 9,407               |       | 6,496 |   |
| Total .                                  |       | $                   | 54,097     |   | $ | 58,435 |   |

 

Realized gains and losses on the sale ofavailable-for-sale securities for the years ended December 31, 2005, 2004,and 2003 were not material.

During the year ended December 31,2005, we recorded a write-down of $11,000 related to the other than temporarydecline in the value of our equity investment in Inflazyme Pharmaceuticals. Duringthe year ended December 31, 2004, we recorded a write-down of $7,851,000related to other than temporary decline in the value of our equity investmentin AVI. We had no such write-downs in 2003.

**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 

F-13

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

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

the placement agent, wepaid the placement agent $1,735,000 in cash, which was treated as part of thecost of the offering. Net proceeds from the offering were $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 theSEC on March 23, 2004 to register the shares issued in the privateplacement as well as the shares to be issued upon exercise of the warrants. Inaccordance with EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock,” the warrantswere included as a liability and valued at fair market value until we met thecriteria under EITF 00-19 for permanent equity. We valued the warrants at$3,307,000 on March 5, 2004 using the Black-Scholes method with thefollowing 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%.  The warrants were then transferred topermanent equity, and the change in the value of the warrant liability between March 5,2004 and March 31, 2004, or $3,616,000, was charged to Change in valuationof derivatives in the accompanying statement of operations during the yearended December 31, 2004. We had no similar charges in the years ended December 31,2005 or 2003.

**Warrants**

At December 31,2005, warrants to purchase the following shares of our common stock wereoutstanding:

| Number of  Shares | ** ** | **Exercise  Price** | ** ** | **Issue  Date** | ** ** | **Expiration  Date** | ** ** |
|------------------------|------------|---------------------|------------|-----------------|------------|----------------------|------------|
| 1,666,000              |       | $                   | 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       |   |   |
| 6,924,919              |       |                |       |            |       |                 |       |   |   |
|                        |            |                     |            |                 |            |                      |            |  |  |  |

 

In March 2001, weentered into agreements with The Kriegsman Group (“Kriegsman”) (also see Notes5 and 9) to perform certain financial consulting and public relations services.In connection with these agreements, we issued Kriegsman a three-year warrantto purchase 200,000 shares of unregistered common stock at an exercise price of$10.47. We calculated the value of the warrant at $758,000 using theBlack-Scholes valuation model, and the value of the warrant was charged toSelling, general and administrative expense in 2001. In February 2003, weextended the expiration date of this warrant by three years, and issuedKriegsman 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 the Black-Scholesvaluation model. The value of our stock on the date of 

F-14

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

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

theextension and new grant was $3.00. The value of the warrant extension and newwarrant grant was charged to Selling, general and administrative expense in 2003.

**Stock Reserved for Future Issuance**

At December 31,2005, we have reserved shares of common stock for future issuance as follows:

| Stock options  outstanding                         |   | 6,549,725  |   |
|----------------------------------------------------|--------|------------|--------|
| Stock options  available for grant                 |   | 2,934,376  |   |
| Warrants to  purchase common stock                 |   | 6,924,919  |   |
| Shares available  for Employee Stock Purchase Plan |   | 127,253    |   |
|                                               |   | 16,536,273 |   |

 

**Stock Repurchase Plan**

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, 2005 and 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, werepurchased 3,299,000 shares of our common stock at a cost, net of commissions,of $19,579,000. All shares repurchased have been retired.

**4. Stock Option Plans**

We have 12,263,000 shares of common stock authorizedfor issuance upon the grant of incentive stock options or nonstatutory stockoptions to employees, directors, and consultants under our stock option plans. 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).

F-15

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

**4. Stock OptionPlans (Continued)**

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, 2003   |       | 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 |   |   |   |   |   |
| Granted at fair  value             |       | 868,650                      |       |   | 5.46 |   |   |   |   |   | 3.68 |   |   |
| Exercised                          |       | (273,080                     | )          |   | 3.38 |   |   |   |   |   |   |   |   |
| Forfeited                          |       | (547,897                     | )          |   | 12.90 |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2005 |       | 6,549,725                    |       |   | $ | 9.07 |   |   | 4,984,371 |   |   |   |   |   |
|                                    |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Informationconcerning the options outstanding at December 31, 2005 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            |       | 1,051,306                    |       |                         | $          | 3.37 |   |   |   | 7.30 |   |   | 946,369 |   |   | $ | 3.33 |   |   |
| **  **4.12  to **  **6.00 |       | 1,704,751                    |       |                         | 5.35       |   |   |   | 5.26 |   |   | 1,290,814 |   |   | 5.36 |   |   |
| **  **6.02  to ** **11.22      |       | 1,266,019                    |       |                         | 7.65       |   |   |   | 7.12 |   |   | 1,030,060 |   |   | 7.65 |   |   |
| ** **11.27  to ** **12.63           |       | 1,509,635                    |       |                         | 11.41      |   |   |   | 7.39 |   |   | 699,218 |   |   | 11.57 |   |   |
| ** **12.73  to ** **68.00           |       | 1,018,014                    |       |                         | 19.51      |   |   |   | 2.77 |   |   | 1,017,910 |   |   | 19.51 |   |   |
| $** **1.75  to $68.00                    |       | 6,549,725                    |       |                         | $          | 9.07 |   |   |   | 6.05 |   |   | 4,984,371 |   |   | $ | 9.21 |   |   |
|                                               |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Proforma information regarding the results of operations and net loss per share(Note 1) is determined as if we had accounted for our employee stock optionsusing the fair value method. Under this method, the fair value of each optiongranted is estimated on the date of grant using the Black-Scholes optionvaluation model. We estimated the fair value for these options at the date ofgrant using the Black-Scholes model with the following assumptions:

| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rate |       | 4.19                             | %          | 2.21 | % | 2.73 | % |
| Dividend yield           |       | —                           |       | — |   | — |   |
| Expected  volatility     |       | 0.814                            |       | 0.804 |   | 0.865 |   |
| Expected life (in years) |       | 5.0                              |       | 5.0 |   | 5.0 |   |

 

F-16

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

**4. Stock Option Plans(Continued)**

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.

Duringthe years ended December 31, 2005, 2004 and 2003, we recorded noncash charges of $268,000, $654,000, and $1,499,000, respectively for stockcompensation related to the modification and acceleration of options associatedwith the change in status or departure of certain Company management.

**5. Stock Purchase andLicense Agreements with MGI PHARMA, Inc.**

In August 2004, we entered into three agreementswith MGI PHARMA, Inc., a Minnesota corporation (“MGI”):  (1) a common stock purchase agreement(the “Stock Purchase Agreement”) for the sale of 4,000,000 shares of our commonstock at a cash price per share of $10.00; (2) a license agreementrelating to DacogenTM (decitabine) (the “License Agreement”); and (3) aninvestor rights agreement that obligates us, within the first anniversary ofthe closing date of the transactions contemplated by the Stock PurchaseAgreement, to file with the SEC a registration statement registering the commonstock for resale, and to use commercially reasonable efforts to cause theregistration statement to become effective within such time period.  The agreements became effective on September 21,2004.

Dacogen is an investigational anti-cancer therapeuticwhich has been 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 continuedto pursue regulatory approvals of Dacogen for the treatment of MDS in theUnited States and Europe, with assistance from MGI, and in accordance with theagreement, all development of Dacogen was transitioned to MGI at the end of2005. MGI will assume full development responsibilities following thistransition 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 

F-17

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

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

attributable to the StockPurchase Agreement, and deferred revenue, for the portion attributable to theLicense Agreement. On August 31, 2004, the date that the Stock Purchase Agreementwas executed, the fair value of our common stock, based on the closing price onthe NASDAQ National Market, was $6.43 per share. Therefore, we allocated$23,662,000, the fair value of 4,000,000 shares of our common stock at $6.43per share, net of related offering costs, to equity, with the remaining$12,625,000 being allocated to deferred revenue. The deferred revenue wasamortized to license revenue over 15 months, the period of time in which ourdevelopment obligations for Dacogen transferred to MGI. During the years ended December 31,2005 and 2004, we recorded amortization of deferred revenue $9,905,000 and$2,720,000, respectively, to Development and license revenue on theaccompanying statements 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 years ended December 31,2005 and 2004, we recorded development revenue of $3,448,000 and $3,646,000,respectively, relating to the reimbursements under this agreement. During theyear ended December 31, 2004, we recognized development revenue of $12,500,000for milestone achievement pertaining to regulatory filings.

**6. Convertible DebtFinancing Transactions**

**February 2003Convertible Debt Transaction**

In February 2003 weentered into a Securities Purchase Agreement for the private placement of SeniorExchangeable Convertible Notes (“February Notes”) in the principal amountof $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.

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

In June 2003, we closed a private placementtransaction in which we issued Senior Convertible Notes (“June Notes”) inthe aggregate principal amount of $21.25 million, to the same holders of ouroutstanding February Notes. The June Notes were payable in four equalquarterly installments which began March 31, 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 the restructuring, the holders ofthe February Notes converted half of the principal amount into shares ofour common stock at the fixed conversion price of $4.25, thereby causing theremaining $10,625,000 principal amount of the outstanding February Notesto have a final maturity date of February 26, 2004. The 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 our 

F-18

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

**6. ConvertibleDebt Financing Transactions (Continued)**

ability to use the AVIShares valued at market at the time of repayment to repay the outstandingprincipal amount. However, 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. The warrants represent a derivative under SFAS 133 that must be recordedat fair value. Changes in the fair value of the derivative are recognized inearnings. During years ended December 31, 2005, 2004 and 2003, we recordedchanges in the value of this derivative of $211,000, $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 ofAVI, which are included in the accompanying balance sheets in Investment instock of related parties. We continue to hold all of the pledged and unpledgedAVI Shares and reflect temporary changes in those share values in accumulatedother comprehensive loss. During 2004 we recorded a write-down of $7,851,000related to an other than temporary decline in the value of our investment in AVI.We had no such write downs in 2005 or 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 had been 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, 2004and 2003, we recorded amortization of the prepaid financing costs totaling$1,811,000 and $3,064,000, respectively, to interest expense. At December 31,2004, all prepaid financing costs had been fully amortized and no expenses wererecorded during the year ended December 31, 2005.

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. At December 31, 2004,the deemed discount on convertible debt had been fully amortized and noexpenses were recorded during the year ended December 31, 2005.

**7. Acquisition andTransfer Agreements**

**Daunorubicin Transfer Agreement**

We received approval of anAbbreviated New Drug Application (“ANDA”) for generic daunorubicin in 2001. In April 2005,we executed a transfer agreement with American Pharmaceutical Partners, Inc.

F-19

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

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

wherebywe transferred the ANDA and all rights, title, and interest in the product for$590,000. We recorded this amount as other revenue during the year ended December 31,2005.

**PfizerInc.—Nipent European Marketing Rights**

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 andhave classified this amount in Other intangibles in the accompanying balancesheet. This amount is being amortized over 31 months, the estimated life of thebenefit period, to Cost of product revenue. During the years ended December 31,2005 and 2004, we have recorded amortization of $387,000 and $323,000,respectively.

**PeregrinePharmaceuticals—VEGF License**

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

The terms of the 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 (“IND”) utilizing the licensed patents.During the year ended December 31, 2005, we paid Peregrine $200,000 incash in connection with this agreement. During the years ended December 31,2004 and 2003, we paid the annual license fees of $200,000 to Peregrine inshares of our common stock. We issued Peregrine 18,454 and 61,653 shares ofunregistered stock in 2004 and 2003, respectively, which were calculated basedon the average price of our common stock during the 30-day periodpreceding the payment date. The annual license fees paid to Peregrine have beencharged to Research and development expense.

**ClaytonFoundation for 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 of formulationsof camptothecins, including OrathecinTM.

During the years ended December 31, 2004 and2003, we recorded expenses of $100,000 each year in connection with theresearch agreement, which we charged to Research and development expense.

In April 2005, weterminated the licensing and research agreement with the Clayton and ResearchDevelopment Foundations. We did not record any expenses in the year ended December 31,2005 in connection with this agreement, and we have no further obligationsunder this agreement.

F-20

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

**7. Acquisition and Transfer Agreements(Continued)**

**Stehlin Foundation—Orathecin**

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

In November 1999, weamended our agreement with Stehlin to broaden the definition of licensedcompounds to include certain analogues of Orathecin. Under this amendment, weare required to seek commercial applications for Orathecin. Under the originalagreement and amendment, we were required to pay Stehlin approximately $9.6million for research and must make cash royalty payments and cash or stockmilestone payments to Stehlin as we develop and commercialize Orathecin. Inaccordance with these agreements, we have paid Stehlin all of the $9.6 millionrequired for research, concluding with a payment of $800,000 in 2003.  During the year ended December 31, 2004,we filed a New Drug Application (“NDA”) for Orathecin with the FDA. 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. There were nopayments to Stehlin during the year ended December 31, 2005.

**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 March 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 behalf,which included a final payment to Abbott of $370,000 in 2003.

In December 1999, we also entered into a Nipent distribution agreement with Abbott. BeginningMarch 1, 2000, Abbott became the exclusive U.S. distributor of Nipent fora period of five years. We retained U.S. marketing rights for Nipent. Underthis agreement, Abbott made a $5 million cash payment to the Company in January 2000.This amount was included in deferred revenue and was being amortized todistribution revenue ratably over 60 months through December 2002.

In March 2003, weentered into an agreement with Abbott that allowed us to terminate the Nipentdistribution agreement, for a stated fee that decreased over time to $1,500,000at March 2005. As part of the agreement, we paid Abbott $500,000 for thisright to terminate the Nipent distribution agreement at our option. The$500,000 was recorded as a reduction of the deferred revenue we initiallyreceived from Abbott for the distribution rights and we stopped amortizing theremaining balance of deferred revenue, which was $1,667,000 at that time. In February 2005, we exercised our optionand paid Abbott $1,500,000 

F-21

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

**8. Terminationof Agreements with Abbott Laboratories (Continued)**

to terminate the Nipent distribution agreement. Thisamount was charged against deferred revenue. The remaining balance in deferredrevenue of $167,000 was recorded as distribution agreement revenue in the yearended December 31, 2005.

**9. Related PartyTransactions**

**EuroGen Pharmaceuticals 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. In December 2002, we became 95% owners ofEuroGen. The remaining 5% is owned by Larry Johnson, the President and CEO ofEuroGen.  The results of EuroGen areincluded in our consolidated operations in Selling, general and administrativeexpenses. During the years ended December 31, 2005, 2004, and 2003, wehave recorded expenses of $3,170,000, $2,269,000 and $325,000, respectively,related to 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 accounted for this investmentunder the cost method as our ownership is less than 20% of KineMed’soutstanding shares. At December 31, 2004, this investment was included onthe balance sheet in Investment in stock of related parties. During 2005, wedetermined that the value of this investment was impaired due to the uncertainviability of KineMed as a going concern. As a result, the entire cost of theinvestment of $180,000 was charged to Selling, general, and administrativeexpense in 2005.

In late 2004, we reachedan agreement with KineMed whereby we granted them exclusive worldwide rights tothe development, manufacture, commercialization and distribution of proprietaryproperty we own relating to etiocholoandeione and etiocholanolone compounds. 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 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 

F-22

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

**9. RelatedParty Transactions (Continued)**

Directors of AVI through March 2004.Under the terms of the agreement, we acquired one million shares of AVI commonstock, which amounted to approximately 7.5% of AVI’s outstanding common stock,for $2.5 million cash and 100,000 shares of our common stock at $28.25 per share.We also acquired exclusive negotiating rights for the United States market forAvicine, AVI’s proprietary cancer vaccine currently in late-stage clinicaltesting against a variety of solid tumors. Avicineis a non-toxic immunotherapy that neutralizes the effect of a tumor-associatedantigen on cancer cells, while stimulating the body’s immune system to reactagainst the foreign tumor.

In July 2000, we finalized an agreement with AVIto obtain the U.S. marketing rights for Avicine. We issued 347,826 shares ofour common stock along with $5 million in cash to AVI as payment for ourinvestment, in exchange for 1,684,211 shares of AVI common stock. As part ofthis agreement, we obtained the right of first discussion to all of AVI’soncology compounds and an option to acquire an additional 10% of AVI’s commonstock for $35.625 per share. This option is exercisable for a three-year periodcommencing on the earlier of the date the FDA accepts the NDA submitted forAvicine or the date on which the closing price of AVI’s common stock exceedsthe option exercise price. We have accounted for the investment in AVI underthe cost method as our ownership is less than 20% of AVI’s outstanding 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 31,2005.

Avicine will requiresignificant additional expenditures to complete the clinical developmentnecessary to gain marketing approval from the FDA and equivalent foreign regulatoryagencies. As part of this agreement, we are obligated to make additionalpayments to AVI based on successful achievement of developmental, regulatoryapproval, and commercialization milestones over the next several years thatcould total $80 million. In 2003 and 2002, we recorded $144,000 and $421,000,respectively, in research and development expenses for Avicine. At December 31,2005, 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 and chief executive officer is aformer director and our former president and chief executive officer iscurrently a director and both are stockholders of Quark Biotech, Inc. (“QBI”),a privately-held development stage biotechnology company. In June 1997, wemade an equity investment of $500,000 in QBI’s preferred stock, whichrepresents less than 1% of the company’s outstanding shares as of December 31,2001. Our investment in QBI is carried at cost and is included in “Investmentin stock of related parties.”

In January 2002, wesubleased a portion of our laboratory space to QBI. During 2003 we collected$56,000  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

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

**9. Related PartyTransactions (Continued)**

**The Kriegsman Group**

In March 2001, weretained The Kriegsman Group to render advice and assistance with respect tofinancial consulting and public relations services. On July 25, 2002, ourformer president and chief executive officer and board member through 2004became a member of the board of directors of CytRx Corp. Steven Kriegsman, thepresident of The Kriegsman Group, is also a significant shareholder andpresident and chief executive officer of CytRx Corp. See Note 3 and 5 for discussion of cash and warrants granted to theKriegsman Group and the accounting treatment of each transaction. Wealso paid The Kriegsman Group consulting fees of $220,000 in 2003. Noconsulting fees were paid to Kriegsman in 2005 or 2004.

**Other**

At December 31, 2005, 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 and $371,000 in 2003 for services andsupplies. There were no payments to this company in 2005. We carry our investment in this company at novalue.

At December 31, 2005and 2004, we have $52,000, and $93,000, respectively, in receivables due fromrelated parties. The receivables consist of advances or loans to employees.

**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 $2.7 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 bothterminate in June 2006. Both spaces have been subleased undernon-cancellable leases terminating at the same time as our master lease.

F-24

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

**10. Commitmentsand 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,** | ** ** |                             | ** ** | ** **           |       |   | ** ** | ** ** |   |
| 2006                              |       |                             | $          | 2,280                | ** ** |   |   | $ | 163 | ** ** |   |
| 2007                              |       |                             | 2,213      | ** **           |       |   | — | ** ** |   |
| 2008                              |       |                             | 2,297      | ** **           |       |   | — | ** ** |   |
| 2009                              |       |                             | 2,347      | ** **           |       |   | — | ** ** |   |
| 2010 and  thereafter              |       |                             | 2,166      | ** **           |       |   | — | ** ** |   |
|                              |       |                             | $          | 11,303               | ** ** |   |   | $ | 163 | ** ** |   |

 

Rent expense was $2,014,000 in 2005, $2,034,000 in 2004,and $1,985,000 in 2003. These amounts were net of sublease income of $326,000in 2005, $323,000 in 2004, and $393,000 in 2003.

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 31,2005.

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, 2005.

**11. Income Taxes**

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

| ** **    | ** ** | **Year ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net Loss:     |       |                                       |       |   |   |   |   |
| United States |       | $                                          | (11,312    | ) | $ | (44,591 | ) | $ | (53,145 | ) |
| Foreign       |       | (3,170                                     | )          | (2,269 | ) | (325 | ) |
|          |       | $                                          | (14,482    | ) | $ | (46,860 | ) | $ | (53,470 | ) |

 

F-25

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

**11. IncomeTaxes (Continued)**

We have incurred netlosses since inception and, consequently, have not recorded any federal orstate income taxes. Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposes. Significantcomponents of our deferred tax assets are as follows (in thousands):

| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Deferred Tax  Assets:                         |       |                  |       |   |   |
| Net operating loss carryforwards              |       | $                     | 112,547    |   | $ | 107,237 |   |
| Purchased in-process technology               |       | 5,761                 |       | 6,477 |   |
| Research and development credit carryforwards |       | 9,619                 |       | 8,899 |   |
| Capitalized research and development          |       | 6,123                 |       | 7,395 |   |
| Investments                                   |       | 9,290                 |       | 6,992 |   |
| Other                                         |       | 1,686                 |       | 1,062 |   |
|                                          |       | 145,026               |       | 138,062 |   |
| Valuation allowance                           |       | (145,026              | )          | (138,062 | ) |
| Net Deferred Tax Assets                       |       | $                     | —     |   | $ | — |   |

 

Realization of deferredtax assets is dependent upon future earnings, if any, the timing and amount ofwhich are uncertain. Accordingly, the net deferred tax assets have been fullyoffset by a valuation allowance. The valuation allowance increased by$6,964,000 during 2005, by $23,200,000 during 2004, and by $17,015,000 during2003.

As of December 31,2005 we have net operating loss carryforwards for federal income tax purposesof approximately $304,788,000 which expire in the years 2006 through 2025, andfederal research and development credit carryforwards of approximately$7,946,000, which expire in the years 2008 through 2025.

As of December 31,2005, we also have net operating loss carryforwards for California state incometax purposes of approximately $102,281,000, which expire in the years 2006through 2015, California state research and development tax credits ofapproximately $7,507,000, which do not expire, and California manufacturer’sinvestment credit of approximately $4,600, which expires in the year 2007.

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

**12. EmployeeBenefit Plans**

We have adopted a 401(k) ProfitSharing Plan (the “401(k) Plan”) for all eligible employees with a minimumof two months of service. We may be obligated to make contributions to the planto comply with statutory requirements. Voluntary employee contributions to the401(k) Plan may be matched by the Company, up to 3% of each participant’sannual compensation. Our expense relating to contributions made to employeeaccounts under the 401(k) Plan was approximately $212,000 in 2005,$222,000 in 2004, and $300,000 in 2003.

In 1998 we established the1998 Employee Stock Purchase Plan (“ESPP”), and a total of 300,000 shares ofCommon Stock are reserved for issuance under the plan. Employees participatingin the ESPP 

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

**12. EmployeeBenefit Plans (Continued)**

aregranted the right to purchase shares of common stock at a price per share thatis the lower of 85% of the fair market value of a share of Common Stock on thefirst day of an offering period, or 85% of the fair market value of a share ofCommon Stock on the last day of that offering period.

**In2005, we issued 26,980 and 24,580 shares through the ESPP at $3.98 and $3.95,respectively. In 2004, we issued 31,685 and 29,372 shares through the ESPP at$6.15 and $5.00, respectively. In 2003, we issued 37,065 and 45,746 sharesthrough the ESPP at $3.59 and $3.82, respectively. As of December 31,2005, 127,253 shares are reserved for future issuance under the ESPP.**

**13. QuarterlyFinancial Data (Unaudited)**

Followingis a summary of the quarterly results of operations for the years ended December 31,2005 and 2004:

| ** **                            | ** ** | **Quarter Ended**                                                          | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **March 31**                                                               | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except per share data)** | ** ** |
| **2005**                              | ** ** | ** **                                                                      | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net product  revenue                  |       | $                                                                               | 1,015      |   | $ | 3,625 |   |   | $ | 5,457 |   |   |   | $ | 5,963 |   |   |
| Cost of product  revenue              |       | 300                                                                             |       | 700 |   |   | 736 |   |   |   | 1,315 |   |   |
| Net loss.                             |       | (6,903                                                                          | )          | (1,888 | ) |   | (2,078 | ) |   |   | (3,613 | ) |   |
| Basic and diluted  net loss per share |       | (0.13                                                                           | )          | (0.04 | ) |   | (0.04 | ) |   |   | (0.07 | ) |   |
| **2004**                              |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Net product  revenue                  |       | $                                                                               | 1,098      |   | $ | 2,636 |   |   | $ | 3,909 |   |   |   | $ | 5,484 |   |   |
| Cost of product  revenue.             |       | 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 |   |   |

 

**14. SubsequentEvent—Agreement to Acquire Montigen Pharmaceuticals, Inc.**

OnJanuary 27, 2006, we announced that we have entered into adefinitive agreement to acquire Montigen Pharmaceuticals, Inc. (“Montigen”),a privately-held oncology-focused drug discovery and development companyheadquartered in Salt Lake City, Utah. Montigen’s assets include its researchand development team, a proprietary drug discovery technology platform andoptimization process, CLIMBTM, and late-stage pre-clinical compounds targetingaurora-A kinase and members of the tyrosine kinase receptor family. One of theMontigen compounds is expected to be the subject of a pre-IND meeting with theFDA later this year.

Pursuant to the terms of the agreement, we will paythe Montigen stockholders a total of $18.0 million upon the closing of thetransaction, consisting of $9.0 million in cash and $9.0 million in shares ofSuperGen common stock. We will pay the Montigen stockholders an additional$22.0 million in shares of SuperGen common stock, contingent upon achievementof specific regulatory milestones. Completion of the acquisition will besubject to approval by the Montigen stockholders, customary closing conditions,and the issuance of a permit from the Commissioner of Corporations for theState of California so that the issuance of the shares of SuperGen common stockwill be exempt from registration under the Securities Act of 1933. The proposedtransaction is expected to close in late March 2006.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized, onthis 16th day of March 2006.
|        |   | 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, 2006 |
| (James  S.J. Manuso)    |          | Director (Principal  Executive Officer)       |       |                |
| /s/ MICHAEL  MOLKENTIN  |          | Chief Financial  Officer (Principal Financial |       | March 16, 2006 |
| (Michael  Molkentin)    |          | and Accounting Officer)                       |       |                |
| /s/ CHARLES  CASAMENTO  |          | Director                                      |       | March 16, 2006 |
| (Charles  J. Casamento) |          |                                          |       |                |
| /s/ THOMAS V.  GIRARDI  |          | Director                                      |       | March 16, 2006 |
| (Thomas  V. Girardi)    |          |                                          |       |                |
| /s/ ALLAN R.  GOLDBERG  |          | Director                                      |       | March 16, 2006 |
| (Allan  R. Goldberg)    |          |                                          |       |                |
| /s/ WALTER J.  LACK     |          | Director                                      |       | March 16, 2006 |
| (Walter  J. Lack)       |          |                                          |       |                |
| /s/ MICHAEL D.  YOUNG   |          | Director                                      |       | March 16, 2006 |
| (Michael  D. Young)     |          |                                          |       |                |

 

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