**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe Quarterly Period Ended September 30, 2006**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from          to          **

**Commissionfile number 0-27628**

**SUPERGEN, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **91-1841574**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (IRS Employer  Identification Number) |

 

| **4140 Dublin Blvd, Suite 200, Dublin, California** |   | **94568**  |
|-----------------------------------------------------|--------|------------|
| (Address of  principal executive offices)           |   | (Zip Code) |

 

**(925) 560 - 0100**

(Registrant’s telephonenumber, including area code)

**Not applicable**

(Former name, formeraddress and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(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

Indicate by check mark whether registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo x.

The number of shares of the registrant’s Common Stock,$.001 par value, outstanding as of November 3, 2006 was 55,152,736.

 

----

**TABLEOF CONTENTS**
|                  | ** ** | ** **                                                                                                                            | ** ** | **Page**No. |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                                                             | ** ** | ** **  |
|             |       | Item 1—Financial Statements (Unaudited)                                                                                          |       |        |
|             |       | Condensed Consolidated Balance Sheets as of  September 30, 2006 and December 31, 2005                             |       | 3           |
|             |       | Condensed Consolidated Statements of Operations for  the three and nine month periods ended September 30, 2006 and 2005          |       | 4           |
|             |       | Condensed Consolidated Statements of Cash Flows for  the nine month periods ended September 30, 2006 and 2005                    |       | 5           |
|             |       | Notes to Condensed Consolidated Financial Statements                                                                                  |       | 6           |
|             |       | Item 2—Management’s Discussion and Analysis of  Financial Condition and Results of Operations      |       | 20          |
|             |       | Item 3—Quantitative and Qualitative Disclosures About  Market Risk                                                               |       | 33          |
|             |       | Item 4—Controls and Procedures                                                                                                   |       | 33          |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                                                 |       |        |
|             |       | Item 1A—Risk Factors                                                                                                             |       | 35          |
|             |       | Item 6—Exhibits                                                                                                                  |       | 49          |
| **SIGNATURES**   |       | 50                                                                                                                                    |

 

2

----

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

| ** **                                                                                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                   | ** ** | **(Unaudited)**        | ** ** | **(Note 1)**     | ** ** |
| **ASSETS**                                                                                                                                                                                   | ** ** |                   | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                              |       |                   |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                   |       |                   | $          | 72,974                |       |   |   | $ | 47,664 |   |   |
| Accounts receivable, net                                                                                                                                                                     |       |                   | 1,267      |                  |       |   | 5,576 |   |   |
| Development revenue  receivable from MGI PHARMA, Inc.                                                                                                                                        |       |                   | 64         |                  |       |   | 550 |   |   |
| Accounts receivable,  Mayne Pharma                                                                                                                                                           |       |                   | 658        |                  |       |   | — |   |   |
| Inventories                                                                                                                                                                                  |       |                   | 168        |                  |       |   | 1,439 |   |   |
| Prepaid distribution and  marketing rights                                                                                                                                                   |       |                   | 1,260      |                  |       |   | — |   |   |
| Prepaid expenses and  other current assets                                                                                                                                                   |       |                   | 1,589      |                  |       |   | 1,407 |   |   |
| Total current assets                                                                                                                                                                         |       |                   | 77,980     |                  |       |   | 56,636 |   |   |
| Marketable securities,  non-current                                                                                                                                                          |       |                   | 199        |                  |       |   | 147 |   |   |
| Investment in stock of  related parties                                                                                                                                                      |       |                   | 682        |                  |       |   | 673 |   |   |
| Due from related  parties, non-current                                                                                                                                                       |       |                   | 40         |                  |       |   | 52 |   |   |
| Property, plant and  equipment, net                                                                                                                                                          |       |                   | 3,090      |                  |       |   | 2,907 |   |   |
| Goodwill                                                                                                                                                                                     |       |                   | 731        |                  |       |   | 731 |   |   |
| Other intangibles, net                                                                                                                                                                       |       |                   | 1,064      |                  |       |   | 290 |   |   |
| Restricted cash and  investments, non-current                                                                                                                                                |       |                   | 11,085     |                  |       |   | 11,805 |   |   |
| Other assets                                                                                                                                                                                 |       |                   | 20         |                  |       |   | 30 |   |   |
| Total assets                                                                                                                                                                                 |       |                   | $          | 94,891                |       |   |   | $ | 73,271 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                               | ** ** |                   | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Accounts payable and  accrued liabilities                                                                                                                                                    |       |                   | $          | 3,477                 |       |   |   | $ | 3,391 |   |   |
| Derivative liability                                                                                                                                                                         |       |                   | 490        |                  |       |   | 1,817 |   |   |
| Payable to AVI  BioPharma, Inc.                                                                                                                                                         |       |                   | 565        |                  |       |   | 565 |   |   |
| Deferred gain on sale of  products to Mayne Pharma                                                                                                                                           |       |                   | 12,235     |                  |       |   | — |   |   |
| Deferred revenue                                                                                                                                                                             |       |                   | 1,007      |                  |       |   | — |   |   |
| Accrued payroll and  employee benefits                                                                                                                                                       |       |                   | 3,797      |                  |       |   | 2,269 |   |   |
| Total current  liabilities                                                                                                                                                                   |       |                   | 21,571     |                  |       |   | 8,042 |   |   |
| Deferred rent.                                                                                                                                                                               |       |                   | 952        |                  |       |   | 972 |   |   |
| Total liabilities                                                                                                                                                                            |       |                   | 22,523     |                  |       |   | 9,014 |   |   |
| Commitments and contingencies                                                                                                                                                                |       |                   |       |                  |       |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| Preferred stock, $.001  par value; 2,000,000 shares authorized; none outstanding                                                                                                             |       |                   | —     |                  |       |   | — |   |   |
| Common stock, $.001 par  value; 150,000,000 shares authorized; 55,151,416 and 51,710,912 shares issued  and outstanding at September 30, 2006 and December 31, 2005,  respectively |       |                   | 55         |                  |       |   | 52 |   |   |
| Additional paid in  capital                                                                                                                                                                  |       |                   | 428,244    |                  |       |   | 409,365 |   |   |
| Accumulated other  comprehensive gain                                                                                                                                                        |       |                   | 3,038      |                  |       |   | 2,850 |   |   |
| Accumulated deficit                                                                                                                                                                          |       |                   | (358,969   | )                     |       |   | (348,010 | ) |   |
| Total stockholders’  equity                                                                                                                                                             |       |                   | 72,368     |                  |       |   | 64,257 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                              |       |                   | $          | 94,891                |       |   |   | $ | 73,271 |   |   |

 

See accompanying notes to condensed consolidated financial statements

3

----

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

| ** **                                                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Net product revenue                                                                           |       | $                                                    | 2,228      |                                                | $          | 5,457 |   | $ | 9,096 |   | $ | 10,096 |   |
| Development and license revenue from MGI PHARMA, Inc.                                         |       | 5,064                                                |       | 3,168                                               |       | 25,064 |   | 10,110 |   |
| Royalty revenue                                                                               |       | 1,043                                                |       | —                                              |       | 1,043 |   | — |   |
| Distribution agreement and other revenue                                                      |       | —                                               |       | —                                              |       | — |   | 757 |   |
| Total revenues                                                                                |       | 8,335                                                |       | 8,625                                               |       | 35,203 |   | 20,963 |   |
| Costs and  operating expenses:                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of product revenue                                                                       |       | 482                                                  |       | 736                                                 |       | 1,877 |   | 1,736 |   |
| Research and development                                                                      |       | 4,651                                                |       | 3,571                                               |       | 11,509 |   | 11,585 |   |
| Selling, general, and administrative                                                          |       | 6,753                                                |       | 6,761                                               |       | 19,312 |   | 20,159 |   |
| Acquired in-process research and development                                                  |       | —                                               |       | —                                              |       | 16,318 |   | — |   |
| Total costs and operating expenses                                                            |       | 11,886                                               |       | 11,068                                              |       | 49,016 |   | 33,480 |   |
| Loss from operations                                                                          |       | (3,551                                               | )          | (2,443                                              | )          | (13,813 | ) | (12,517 | ) |
| Interest income                                                                               |       | 796                                                  |       | 444                                                 |       | 1,794 |   | 1,227 |   |
| Gain on  disposition of investment in AVI BioPharma stock resulting from exercise of  warrant |       | —                                               |       | —                                              |       | 780 |   | — |   |
| Change in  valuation of derivatives                                                           |       | 654                                                  |       | (79                                                 | )          | 1,327 |   | 421 |   |
| Loss before  income tax                                                                       |       | (2,101                                               | )          | (2,078                                              | )          | (9,912 | ) | (10,869 | ) |
| Income tax provision                                                                          |       | (217                                                 | )          | —                                              |       | (252 | ) | — |   |
| Net loss                                                                                      |       | $                                                    | (2,318     | )                                                   | $          | (2,078 | ) | $ | (10,164 | ) | $ | (10,869 | ) |
| Basic and diluted  net loss per comon share                                                   |       | $                                                    | (0.04      | )                                                   | $          | (0.04 | ) | $ | (0.19 | ) | $ | (0.21 | ) |
| Weighted average  shares used in basic and diluted net loss per common share calculation      |       | 53,607                                               |       | 51,320                                              |       | 52,858 |   | 51,215 |   |

 

See accompanying notes to condensed consolidated financial statements

4

----

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

| ** **                                                                                 | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Operating activities:                                                                      |       |                                                |       |   |   |
| Net loss                                                                                   |       | $                                                   | (10,164    | ) | $ | (10,869 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                                |       |   |   |
| Depreciation                                                                               |       | 587                                                 |       | 629 |   |
| Amortization of intangibles and distribution and  marketing rights                         |       | 1,343                                               |       | 290 |   |
| Amortization of deferred revenue                                                           |       | —                                              |       | (7,429 | ) |
| Change in valuation of derivatives                                                         |       | (1,327                                              | )          | (421 | ) |
| Stock compensation expense                                                                 |       | 2,566                                               |       | 377 |   |
| Gain on disposition of investment in AVI BioPharma  stock                                  |       | (780                                                | )          | — |   |
| Cash paid for distribution and marketing rights                                            |       | (2,100                                              | )          | (1,500 | ) |
| Acquired in-process research and development                                               |       | 16,318                                              |       | — |   |
| Changes in  operating assets and liabilities:                                              |       |                                                |       |   |   |
| Accounts receivable and development revenue  receivable                                    |       | 4,137                                               |       | 13,099 |   |
| Inventories                                                                                |       | 846                                                 |       | 864 |   |
| Prepaid expenses and other assets                                                          |       | (802                                                | )          | (111 | ) |
| Due from related parties                                                                   |       | 12                                                  |       | 36 |   |
| Restricted cash and investments                                                            |       | 128                                                 |       | 547 |   |
| Accounts payable and other liabilities                                                     |       | 334                                                 |       | (2,189 | ) |
| Deferred revenue                                                                           |       | 1,007                                               |       | (167 | ) |
| Net cash provided by (used in) operating activities                                        |       | 12,105                                              |       | (6,844 | ) |
| Investing activities:                                                                      |       |                                                |       |   |   |
| Purchases of marketable securities                                                         |       | —                                              |       | (11,585 | ) |
| Sales or maturities of marketable securities                                               |       | 1,500                                               |       | 28,136 |   |
| Purchases of property and equipment                                                        |       | (365                                                | )          | (101 | ) |
| Proceeds from sale of products to Mayne Pharma                                             |       | 13,395                                              |       | — |   |
| Acquisition of Montigen net assets, net of cash  acquired                                  |       | (8,693                                              | )          | — |   |
| Net cash provided  by investing activities                                                 |       | 5,837                                               |       | 16,450 |   |
| Financing activities:                                                                      |       |                                                |       |   |   |
| Proceeds from issuance of common stock, net of  issuance costs                             |       | 7,368                                               |       | 989 |   |
| Net cash provided  by financing activities                                                 |       | 7,368                                               |       | 989 |   |
| Net increase in  cash and cash equivalents                                                 |       | 25,310                                              |       | 10,595 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 47,664                                              |       | 38,394 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                                   | 72,974     |   | $ | 48,989 |   |
| Supplemental  Disclosure of Non-Cash Financing Activities:                                 |       |                                                |       |   |   |
| Common stock  issued in connection with Montigen acquisition                               |       | $                                                   | 8,947      |   | $ | — |   |

 

See accompanying notes to condensed consolidated financial statements

5

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 1.**   BASIS OF PRESENTATION

The accompanying condensed unaudited consolidatedfinancial statements of SuperGen, Inc. (“we,” “SuperGen” or the “Company”)have been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring adjustments, other than thecumulative effect adjustment described below) considered necessary for a fairpresentation have been included. Operating results for the three and nine monthperiods ended September 30, 2006 are not necessarily indicative of resultsthat may be expected for the year ending December 31, 2006.

The balance sheet at December 31, 2005 has beenderived from the audited financial statements at that date, but does not includeall the information and footnotes required by generally accepted accountingprinciples for complete financial statements.

For further information,refer to the consolidated financial statements and footnotes included in theCompany’s annual report on Form 10-K for the year endedDecember 31, 2005.

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

Duringthe third quarter of 2006 a previously unrecorded United Kingdom (“UK”) payrollrelated liability was identified. We estimate this liability aggregates$930,000 as of September 30, 2006, related to withholding and otherpersonal income tax, penalties and interest involving a former SuperGenemployee who was a United States citizen and worked in the UK. The liabilityoriginated during the years 2002—2006 and was identified as a result of recentdisclosures made by a UK employee to our auditors. We determined that $795,000of the liability relates to periods prior to 2006. The following table illustratesthe amount of the error that originated in each of the years between 2002 and2005 (in thousands):

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

 

We adopted the provisionsof Staff Accounting Bulletin No. 108, “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements”**(“SAB 108”). Prior to the adoptionof SAB 108, we quantified misstatements based on the amount of the errororiginating in the current year statement of operations (“rollover approach”).SAB 108 requires that in addition to considering the amount of the errororiginating in the current year statement of operations, the misstatementexisting at each balance sheet date should also be considered, irrespective ofthe period of origin of the error (“iron curtain approach”). We do not believethat any of the amounts included in the table above are material to the periodsin which they originated using the rollover approach. However, using the ironcurtain method upon adoption of SAB 108, we have determined that the quantitativecumulative error aggregating approximately $795,000 that existed as of December31, 2005 is material to 

6

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 1.**   BASIS OF PRESENTATION (Continued)

the 2005 financial statements. As permitted whenfirst applying the guidance in SAB 108, prior periods were not restated. Thecumulative effect of the initial application of SAB 108 for quantification andcorrection of the error is included in the carrying amounts of liabilities andaccumulated deficit as of September 30, 2006 in the accompanying balancesheet. The impact of this cumulative effect adjustment is an increase toaccrued payroll and employee benefits of $795,000 and an increase toaccumulated deficit of $795,000 as of January 1, 2006. The following tableillustrates the effect of the cumulative effect adjustment recorded as ofJanuary 1, 2006 (in thousands):

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

 

The $135,000 of theliability that originated during 2006 is included in selling, general and administrativeexpense for the three and nine-month periods ended September 30, 2006.$45,000 and $62,000 of the amount recorded during the quarter endedSeptember 30, 2006 originated during the quarters ended June 30, 2006and March 31, 2006, respectively. We do not believe that these amounts arematerial to the quarters in 2006 in which they originated and should have beenreported, nor do we believe the prospective correction of such amounts duringthe quarter ended September 30, 2006 is material to our consolidatedoperating results for such quarter.

**NOTE 2.**   STOCK-BASEDCOMPENSATION

Effective January 1, 2006, we adopted the fairvalue recognition provisions of Statement of Financial Accounting StandardsNo. 123(R), “Share-Based Payment”(“SFAS 123R”), using the modified-prospective-transition method. Under thistransition method, compensation cost recognized for the three and nine monthsended September 30, 2006 includes: (a) compensation cost for allstock-based payments granted, but not yet vested as of January 1, 2006,based on the grant-date fair value estimated in accordance with the originalprovisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation”(“SFAS 123”), and (b) compensation cost for all stock-basedpayments granted subsequent to January 1, 2006, based on the grant-datefair value estimated in accordance with the provisions of SFAS 123R. Suchamounts have been reduced by our estimate of forfeitures of all unvestedawards. Results for prior periods have not been restated.

*StockOption Plans.**  *Wehave 12,263,000 shares of common stock authorized for issuance upon the grantof incentive stock options or nonstatutory stock options to employees,directors, and consultants under our stock option plans, including our 2003Stock Plan and 1996 Directors’ Stock Option Plan. The number of shares to bepurchased, their price, and the terms of payment are determined by our Board ofDirectors, provided that the exercise price for incentive stock options cannotbe less than the fair market value on the date of grant. The options grantedgenerally expire ten years after the date of grant and 

7

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 2.**   STOCK-BASED COMPENSATION (Continued)

become exercisable at suchtimes and under such conditions as determined by the Board of Directors(generally over a four or five year period).

*EmployeeStock Purchase Plan.*   We also have an employeestock purchase plan (“ESPP”) that allows eligible employees to purchase commonstock at a price per share equal to 85% of the lower of the fair market valueof the common stock at the beginning or end of each six month period during theterm of the ESPP. The current offering period began May 15, 2006 and isscheduled to end on November 14, 2006. Under Accounting Principles BoardOpinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”), we were not required to recognizestock-based compensation expense for the cost of stock options or shares issuedunder the Company’s ESPP. Upon adoption of SFAS 123R, we began recordingstock-based compensation expense related to the ESPP.

As a result of the January 1, 2006 adoption ofSFAS 123R, we recognized $1,093,000 and $2,537,000, respectively in stock basedcompensation expense for the three and nine months ended September 30,2006. As a result of this adoption, our basic and diluted net income per commonshare for the three months ended September 30, 2006 are lower by $0.02,and our basic and diluted net loss per common share for the nine months endedSeptember 30, 2006 are lower by $0.05.

Thefair value of each stock award is estimated on the grant date using theBlack-Scholes option-pricing model based on the assumptions noted in thefollowing table:

| ** **               | ** ** | **Three months ended  September 30,**     | ** ** | **Nine months ended  September 30,**      | ** ** |
|--------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **               | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| Risk-free  interest rate |       |                                                     | 4.78       | %                                                        |       |   | 4.02 | % |   |   | 4.75 | % |   |   | 4.09 | % |   |
| Dividend yield           |       |                                                     | —     |                                                     |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Expected  volatility     |       |                                                     | 65.91      | %                                                        |       |   | 81.30 | % |   |   | 65.97 | % |   |   | 82.18 | % |   |
| Expected life (in years) |       |                                                     | 5.18       |                                                     |       |   | 5.00 |   |   |   | 5.18 |   |   |   | 5.00 |   |   |

 

Upon the adoption of SFAS 123R in 2006, we changed ourmethod of computing expected volatility to include a blend of historical volatilityand implied volatility of our common stock based on the period of timecorresponding to the expected life of the stock options. We could not relyexclusively on implied volatility because options on SuperGen stock withremaining terms of greater than one year are not regularly traded in themarket. In prior years, we calculated the fair value of stock awards using onlyhistorical volatility dating back to 1996. The expected life of stock optionsgranted is based exclusively on historical data and represents the weightedaverage period of time that stock options granted are expected to beoutstanding. The expected life is applied to one group as a whole as we do notexpect substantially different exercise or post-vesting termination behavioramong our employee population. The risk-free interest rate is based on the U.S.Treasury yield curve in effect at the time of grant commensurate with theexpected life assumption.

We are using the straight-line attribution method torecognize stock-based compensation expense. The amount of stock-basedcompensation recognized during a period is based on the value of the portion ofthe awards that are ultimately expected to vest. SFAS 123R requires forfeituresto be estimated at the 

8

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 2.**   STOCK-BASED COMPENSATION (Continued)

time of grant and revised,if necessary, in subsequent periods if actual forfeitures differ from thoseestimates. The term “forfeitures” is distinct from “cancellations” or“expirations” and represents only the unvested portion of the surrenderedoption. We have applied an annual forfeiture rate of 12.02% to all unvestedoptions as of September 30, 2006. This analysis will be re-evaluatedquarterly and the forfeiture rate will be adjusted as necessary. Ultimately,the actual expense recognized over the vesting period will only be for thoseshares that vest.

Asummary of the Company’s stock option activity as of September 30, 2006,and changes during the nine months then ended is presented below:

| ** **                                             | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Balance at  December 31, 2005                     |       |                     | 6,549,725  |                                   |       |                                                | $          | 9.07                            |       |   |   |   |   |   |   |   |
| Granted                                                |       |                     | 963,089    |                                   |       |                                                | $          | 4.92                            |       |   |   |   |   |   |   |   |
| Exercised                                              |       |                     | (126,940   | )                                      |       |                                                | $          | 4.72                            |       |   |   |   |   |   |   |   |
| Forfeited                                              |       |                     | (31,343    | )                                      |       |                                                | $          | 6.27                            |       |   |   |   |   |   |   |   |
| Expired                                                |       |                     | (590,306   | )                                      |       |                                                | $          | 7.25                            |       |   |   |   |   |   |   |   |
| Balance at  September 30, 2006                    |       |                     | 6,764,225  |                                   |       |                                                | $          | 8.74                            |       |   |   | 6.38 |   |   | $ | 1,491,619 |   |
| Vested or expected to vest at September 30,  2006 |       |                     | 6,449,658  |                                   |       |                                                | $          | 8.74                            |       |   |   | 6.31 |   |   | $ | 1,477,111 |   |
| Exercisable at  September 30, 2006                |       |                     | 5,241,565  |                                   |       |                                                | $          | 9.08                            |       |   |   | 5.86 |   |   | $ | 1,379,484 |   |

 

The weighted-average grant-date fair value of optionsgranted during the nine months ended September 30, 2006 was $2.94. Thetotal intrinsic value of options exercised (i.e. the difference between themarket price at exercise and the price paid to exercise the options) during thenine months ended September 30, 2006 was $52,000 and the total amount ofcash received from exercise of these options was $599,000.

As of September 30, 2006, there was $4,032,000 oftotal unrecognized compensation cost related to unvested stock-based awards.This cost is expected to be recognized over a weighted average period of 2.63years. We expect approximately 1,208,093 in unvested options to vest at somepoint in the future. Options expected to vest is calculated by applying anestimated forfeiture rate to the unvested options.

9

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 2.**   STOCK-BASED COMPENSATION (Continued)

The following tableillustrates the effect on net loss and net loss per share had we applied thefair value recognition provisions of SFAS 123R in the three and nine monthsended September 30, 2005. For purposes of this pro-forma disclosure, thevalue of the options is estimated using a Black-Scholes option-pricing modeland amortized to expense over the options’ vesting periods (in thousands,except per share amounts):

| ** **                                                                                                                                                                            | ** ** | **Three months  ended  September 30,  2005** | ** ** | **Nine months  ended  September 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **(Revised)**                                          | ** ** |
| Net loss, as  reported                                                                                                                                                                |       |                                                   | $          | (2,078                                                | )          |   |   | $ | (10,869 | ) |   |
| Add: Stock-based  employee compensation expense included in the determination of net loss,  as reported                                                                          |       |                                                   | —     |                                                  |       |   | 268 |   |   |
| 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 |       |                                                   | (978       | )                                                     |       |   | (5,183 | ) |   |
| Pro forma net  loss                                                                                                                                                                   |       |                                                   | $          | (3,056                                                | )          |   |   | $ | (15,784 | ) |   |
| Basic and diluted  net loss per common share:                                                                                                                                         |       |                                                   |       |                                                  |       |   |   |   |   |
| As reported                                                                                                                                                                           |       |                                                   | $          | (0.04                                                 | )          |   |   | $ | (0.21 | ) |   |
| Pro forma                                                                                                                                                                             |       |                                                   | $          | (0.06                                                 | )          |   |   | $ | (0.31 | ) |   |

 

During the preparation ofthe notes to the condensed consolidated financial statements for the quarterended March 31, 2006, we determined that the calculation of our pro-formanet loss reported under SFAS 123 for the year ended December 31, 2005, aspreviously reported, was understated as a result of our having inadvertentlyexcluded the fair value of (and, therefore, the amortization expense relatedto) options granted to members of our Board of Directors during 2002 through2005. Accordingly, pro-forma expense for each of the 2005 quarterly periodsended March 31, June 30, September 30 and December 31 wasunderstated by $76,000, $82,000, $120,000, and $120,000, respectively, or $398,000for the year ended December 31, 2005. These revisions had no effect on ourpreviously reported consolidated results of operations or financial condition.

**NOTE 3.**   CASH,CASH EQUIVALENTS, AND MARKETABLE SECURITIES

Cash and cash equivalents include bank demanddeposits, certificates of deposit, investments in debt securities withmaturities of three months or less when purchased, and an interest in moneymarket funds which invest primarily in U.S. government obligations andcommercial paper. These instruments are highly liquid and are subject toinsignificant risk.

Investments in marketable securities consist of equitysecurities and corporate or government debt securities that have a readilyascertainable market value and are readily marketable. We report theseinvestments at fair value. We designate all marketable securities asavailable-for-sale, with unrealized gains and losses included as a component ofequity.

10

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 3.**   CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES(Continued)

The following is a summaryof available-for-sale securities as of September 30, 2006 (in thousands):

| ** **                      | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|---------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| U.S. corporate  debt securities |       |                | $          | 63,190                       |       |                          |       | $                   | 8          |   |   |   | $ | (1 | ) |   |   | $ | 63,197 |   |   |
| Marketable equity  securities   |       |                | 5,846      |                         |       |                          | 3,031      |                |       |   | — |   |   |   | 8,877 |   |   |
| Total                           |       |                | $          | 69,036                       |       |                          |       | $                   | 3,039      |   |   |   | $ | (1 | ) |   |   | $ | 72,074 |   |   |

 

Theavailable-for-sale securities are classified on the balance sheet as ofSeptember 30, 2006 as follows (in thousands):

| ** **                                                  | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| Amounts included  in cash and cash equivalents              |       |                | $          | 63,190                       |       |                          |       | $                   | 8          |   |   |   | $ | (1 | ) |   |   | $ | 63,197 |   |   |
| Amounts included  in investment in stock of related parties |       |                | 120        |                         |       |                          | 62         |                |       |   | — |   |   |   | 182 |   |   |
| Amounts included  in restricted cash and investments        |       |                | 5,602      |                         |       |                          | 2,894      |                |       |   | — |   |   |   | 8,496 |   |   |
| Marketable  securities, non-current                         |       |                | 124        |                         |       |                          | 75         |                |       |   | — |   |   |   | 199 |   |   |
| Total                                                       |       |                | $          | 69,036                       |       |                          |       | $                   | 3,039      |   |   |   | $ | (1 | ) |   |   | $ | 72,074 |   |   |

 

Available-for-salesecurities by contractual maturity are shown below (in thousands):

| ** **                               | ** ** | **Fair Value**          | ** ** |
|------------------------------------------|------------|------------------------------|------------|
| ** **                               | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| Debt securities  due in one year or less |       |                         | $          | 63,197 |   |   |   | $ | 44,690 |   |   |
| Marketable equity  securities            |       |                         | 8,877      |   |   |   | 9,407 |   |   |
| Total                                    |       |                         | $          | 72,074 |   |   |   | $ | 54,097 |   |   |

 

**NOTE 4.**   INVENTORIES

Inventoriesconsist of the following (in thousands):

| ** **      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials   |       |                         | $          | —                      |       |   |   | $ | 67 |   |   |
| Work in process |       |                         | 152        |                        |       |   | 197 |   |   |
| Finished goods  |       |                         | 16         |                        |       |   | 1,175 |   |   |
| Total           |       |                         | $          | 168                         |       |   |   | $ | 1,439 |   |   |

 

Inventories at September 30,2006 consisted only of mitomycin. See Note 7 below relating to the sale of ourother products.

11

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 5.**   LICENSEAND STOCK PURCHASE AGREEMENTS WITH MGI PHARMA, INC.

In August 2004, we entered into three agreementswith MGI PHARMA, Inc., a Minnesota corporation (“MGI”): (1) a licenseagreement relating to DacogenTM (decitabine), (2) a common stock purchaseagreement, and (3) an investor rights agreement. The agreements becameeffective on September 21, 2004. Dacogen is an investigational anti-cancertherapeutic which was recently approved by the United States Food DrugAdministration (“FDA”) for the treatment of patients with myelodysplasticsyndrome (“MDS”).

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

In accordance with the stock purchase agreement, weissued 4,000,000 shares of our common stock to MGI at $10.00 per share, foraggregate proceeds totaling $40,000,000. We paid the placement agent $3,200,000in cash and issued the placement agent a warrant exercisable for 400,000 sharesof our common stock at an exercise price of $10.00 per share. We calculated thefair value of the warrant at $1,436,000. We allocated the aggregate proceedsand related costs of the placement agent fee and warrant valuation betweenequity, for the portion attributable to the stock purchase agreement, anddeferred revenue, for the portion attributable to the license agreement.Therefore, we allocated $23,662,000, the fair value of 4,000,000 shares of ourcommon stock at the time of the transaction, net of related offering costs, toequity, and allocated $12,625,000 to deferred revenue. The deferred revenue wasamortized to license revenue over 15 months, which was the period of time inwhich our development obligations for Dacogen transferred to MGI. During thethree and nine months ended September 30, 2005, we recorded amortizationof deferred revenue of $2,476,000 and $7,429,000, respectively. The deferredrevenue was fully amortized at December 31, 2005, so we had noamortization in 2006.

Under the terms of the license agreement, MGI wasobligated to reimburse us for certain development and allocated overhead costsof Dacogen until we received marketing authorization. In the three and ninemonths ended September 30, 2005, we recognized $692,000 and $2,681,000,respectively of development revenue relating to the reimbursement under thisagreement. During the three and nine months ended September 30, 2006, werecorded development revenue of $64,000.

In May 2006, the FDA approved Dacogen for thetreatment of patients with MDS and MGI commenced commercial sales of Dacogen inthe United States. In accordance with our license agreement with MGI, wereceived a milestone payment of $20.0 million in the second quarter of 2006.MGI is 

12

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 5.**   LICENSE AND STOCK PURCHASE AGREEMENTS WITH MGI PHARMA, INC.(Continued)

required to pay usroyalties of 20% to 30% of net Dacogen sales within 45 days after the end ofeach calendar quarter. During the three and nine month periods endedSeptember 30, 2006, we recorded royalty revenue of $1,043,000. We recognize royalty revenue on a cash basiswhen we receive it from MGI because we do not have sufficient ability toaccurately estimate Dacogen sales

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

**NOTE 6.**   ACQUISITIONOF MONTIGEN PHARMACEUTICALS, INC.

On April 4, 2006, we completed our acquisition ofMontigen Pharmaceuticals, Inc. (“Montigen”), a privately-heldoncology-focused drug discovery and development company headquartered in SaltLake City, Utah. Montigen’s assets include its research and development team, aproprietary drug discovery technology platform and optimization process, CLIMBTM,and late-stage pre-clinical compounds targeting aurora-A kinase and members ofthe tyrosine kinase receptor family.

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

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

13

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 6.**   ACQUISITION OF MONTIGEN PHARMACEUTICALS, INC.(Continued)

The aggregate purchaseprice of Montigen was $18,127,000, which included cash paid of $8,989,000, theissuance of 1,625,626 shares of SuperGen common stock valued at $8,947,000 intotal, and $191,000 in direct transaction costs. The purchase price has beenallocated on April 4, 2006 as follows (in thousands):

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

 

The $532,000 of net tangible assets included $486,000in cash, prepaids and other current assets of $37,000, $405,000 of fixedassets, and $396,000 of assumed liabilities. The values assigned to assembledworkforce and CLIMB technology platform are being amortized over three years,the estimated useful lives of the assets. The accumulated amortization of theassembled workforce and CLIMB technology was $39,000 and $174,000, respectivelyat September 30, 2006.

Thevalue assigned to acquired in-process research and development represented thefair value of Montigen’s incomplete research and development programs that hadnot yet reached technological feasibility and had no alternative future use asof the acquisition date. A summary of these compounds is as follows (inthousands):

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

 

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

14

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 7.**   ASSETACQUISITION AGREEMENT WITH MAYNE PHARMA

On August 22, 2006,we executed an Asset Acquisition Agreement with Mayne Pharma (USA), Inc.(“Mayne”), pursuant to which Mayne acquired the North American rights toNipent® and SurfaceSafe® cleaning system. We received cash proceeds of$13,395,000 upon closing of the transaction, which represented the purchaseprice per the agreement, reduced by a number of adjustments and holdbacks, asfollows (in thousands):

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

 

The mitomycin reduction represents a reduction in theproposed purchase price for the mitomycin product line that was originally tobe sold as part of the transaction but was removed during the finalnegotiations. The supply holdback is being held by Mayne until we complete thequalification and deliver an FDA approved manufacturer of Nipent. Theindemnification holdback will be held by Mayne for 18 months to cover anypotential claims. The net asset adjustment reflects the difference in value ofthe net assets acquired in the agreement from the initial negotiation date tothe final closing date. The channel inventory adjustment represents thedifference between the value of inventory in the supply chain at thenegotiation date and the final closing date.

In addition to the initial payment and holdbacks, wemay receive annual deferred payments totaling $14,140,000 over the next fiveyears based on achievement of specific annual sales targets by Mayne. Theseannual deferred payments may be accelerated under certain circumstances,including a change of control at Mayne.

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

*TransitionServices Agreement—**We* have agreed to provide certaintransition services to Mayne. This includes utilization of our sales andmarketing personnel during a six month transition period, for which we arebeing reimbursed by Mayne. In addition, Mayne has agreed to provide certaintransition services, without charge, related to supporting approval of aspecified manufacturer of Nipent in Europe. During the three months endedSeptember 30, 2006, we have billed $658,000 for services provided toMayne, which has been recorded as a reduction of our selling, general and administrativeoperating expenses.

*SupplyAgreement—**To*support our European business,Mayne will provide us with a supply of Nipent indefinitely or until ourpotential sale of the European business to Mayne is finalized. During the threemonths ended September 30, 2006, we purchased $503,500 of Nipent fromMayne.

15

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 7.**   ASSET ACQUISITION AGREEMENT WITH MAYNE PHARMA(Continued)

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

*Reimbursementof Costs for Alternate Supply—**We*are obligated toreimburse Mayne up to $1 million for transferring manufacturing andpurification capabilities related to crude pentostatin from the existingmanufacturer to Mayne’s specified facility. During the three months endedSeptember 30, 2006, we recorded $49,000 for alternate supply costreimbursements.

*DevelopmentPlan Payments—**We* are obligated to pay allremaining amounts due under a validation and supply agreement for qualificationof a Nipent manufacturing facility. This provision relates directly to the $5million supply holdback noted above. During the three months endedSeptember 30, 2006, we incurred $155,000 of costs related to thisobligation.

*PriceProtection—**We* are obligated to reimburse Maynefor three years for amounts paid to a new supplier of Nipent in excess of theamounts referenced in the Supply Agreement noted above. Contract negotiationshave not been completed on the new supply agreement and we believe there remainsuncertainty around the amount of the price protection exposure. We expect thatMayne and the new supplier will have completed negotiations by the firstquarter of 2007. Once the supply agreement is negotiated we anticipate that wewill have an appropriate basis to assess whether, and to what extent, any priceprotection exposure exists, which will impact when we recognize the net gain onsale for this transaction.

*Retentionand Severance Costs—**We* are obligated to pay allretention and severance costs for employees that continue to perform servicesunder the Transition Services Agreement. Since our employees are required tostay with the company and perform transition related services before they cancollect their retention and severance, we will accrue the retention andseverance costs as they are earned. As of September 30, 2006, we recorded$565,000 of earned and accrued retention and severance costs, which are includedin accrued payroll and employee benefits and recorded in selling, general andadministrative expenses. We expect total retention and severance costs to beapproximately $2.0 million at the end of the transition services period.

From the initial cash proceeds from the agreement of$13,395,000, we have deducted the value of net assets delivered to Mayne,including inventory, prepaid expenses, and manufacturing equipment, and havecomputed a net gain of $12,235,000. However, due to the uncertainty regardingthe price protection exposure noted above, we have deferred the entire net gainas of September 30, 2006.

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

16

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 8.**   NIPENTEUROPEAN MARKETING AND DISTRIBUTION RIGHTS

**Pfizer MarketingRights**

In February 2004, weentered into a Purchase and Sale Agreement with Pfizer Inc. to acquire Europeanmarketing rights for Nipent, our drug that is currently approved for marketingin the United States for hairy cell leukemia. We paid Pfizer $1,000,000 underthis agreement and have classified this amount in Prepaid distribution andmarketing rights in the accompanying balance sheet. This amount has beenamortized over 31 months, the estimated life of the benefit period. Accumulatedamortization was $613,000 at September 30, 2005, and was fully amortizedat September 30, 2006.

**Wyeth DistributionRights**

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

During the transition period, we are continuing toship vials of Nipent to Wyeth for sale and distribution in various countries inEurope. On a monthly basis, Wyeth has remitted to SuperGen an additionalamount, defined in the amended and restated supply agreement as the “netprofit,” based on Wyeth’s sales of Nipent. The net profit has been computed asWyeth’s invoiced net sales, less the product acquisition cost from SuperGen,less 5% transfer fee and less 5% distribution fee. Recurring remittances toSuperGen may be adjusted by any Wyeth invoiced trade receivable that is overdueby 60 days or more. At the time distribution rights transfer, we will berequired to repurchase any unsold inventory held by Wyeth with a shelf lifegreater than 12 months and limited amounts of packaging materials.

We recorded the initial$2.1 million payment to Wyeth as Prepaid distribution and marketing rights, andare amortizing it as a reduction of product revenue over 10 months, whichcorresponds to the termination acceleration period of June 2006 throughMarch 2007.  Accumulatedamortization was $840,000 at September 30, 2006. Revenue related to ourtwo product shipments in May and September 2006 to Wyeth totaling$1,007,000 has been deferred. We will recognize the revenue, and related costof revenue, when these vials are delivered to the end customer by Wyeth. Wehave determined that Wyeth’s ability to collect from the end customer isreasonably assured. At the time distribution rights are transferred, we expectthat any remaining deferred revenue from distributor shipments will approximateSuperGen’s obligation to repurchase unsold inventory from Wyeth. During thethree months ended September 30, 2006, we received $446,000 of net profitfrom Wyeth, which was included in net product revenue.

17

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 9.**   CONVERTIBLEDEBT FINANCING DERIVATIVE LIABILITY AND COLLATERAL

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. In connection with the issuanceof the June Notes, we issued to the note holders warrants to purchase the2,634,211 shares of AVI BioPharma, Inc. that we own (“AVI Shares”) at anexercise price of $5.00 per share. The warrants represent a derivative underSFAS 133 that must be recorded at fair value. Changes in the fair value of thederivative are recognized in earnings. During the three months endedSeptember 30, 2006 and 2005, we recorded changes in the value of thisderivative of $654,000 and $(79,000), respectively. During the nine monthsended September 30, 2006 and 2005, we recorded changes in the value ofthis derivative of $1,327,000 and $421,000, respectively.

During the nine months ended September 30, 2006,one of the warrant holders exercised 300,000 warrants. As part of thistransaction, we received $1,500,000 in cash and transferred 300,000 of the AVIShares to the warrant holder.  Werecognized a gain on disposition of the shares of $780,000, representing thedifference between our carrying value of the shares and the proceeds wereceived.

In connection with theissuance of the warrants to acquire the AVI Shares, we pledged the AVI Sharesinto a collateral account. The fair value of the AVI Shares is included in theaccompanying balance sheet under non-current Restricted cash andinvestments.  We also hold an additional50,000 shares of AVI, which are included in the accompanying balance sheet inInvestment in stock of related parties. We continue to hold the remaining2,334,211 pledged and 50,000 unpledged AVI Shares and reflect temporary changesin those share values as part of accumulated other comprehensive gain or lossin stockholders’ equity.

**NOTE 10.**   TERMINATIONOF AGREEMENT WITH ABBOTT LABORATORIES

In December 1999, we entered into a Nipent distribution agreement with AbbottLaboratories. Beginning March 1, 2000, Abbott became the exclusive U.S.distributor of Nipent for a period of five years. We retained U.S. marketingrights for Nipent. Under this agreement, Abbott made a $5 million cash paymentto the Company in January 2000. This amount was included in deferredrevenue and was being amortized to distribution revenue over 60 months.

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 theright 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 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 ninemonth period ended September 30, 2005. We had no similar revenue duringthe nine month period ended September 30, 2006.

18

----

**SUPERGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) SEPTEMBER 30, 2006 (Unaudited)**

**NOTE 11.**   COMPREHENSIVELOSS

Comprehensive losses consisted primarily of the netincome or loss and changes in unrealized gains or losses on investments. Forthe three months ended September 30, 2006 and 2005, total comprehensivelosses amounted to $2,629,000 and $1,202,000, respectively.   We recorded unrealized losses on investmentsof $311,000 for the three months ended September 30, 2006 and unrealizedgains on investments of $876,000 for the three months ended September 30,2005.

For the nine months endedSeptember 30, 2006 and 2005, total comprehensive losses amounted to$9,661,000 and $10,113,000, respectively. We recorded unrealized gains on investments of $503,000 for the ninemonths ended September 30, 2006 and $756,000 and for the nine months endedSeptember 30, 2005.

**NOTE 12.**   BASICAND DILUTED EARNINGS (LOSS) PER SHARE

In periods in which we have reported operating losses,basic and diluted net loss per common share is computed by dividing net loss bythe weighted average number of shares outstanding during the period. The effectof assuming the exercise of options and warrants would be anti-dilutive and,therefore, basic and diluted net loss per share are the same.

Thecomputation of diluted net loss per share for the three and nine months endedSeptember 30, 2006 and 2005 excludes the impact of the following (inthousands):

| ** **                         | ** ** | **September 30,** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Options to  purchase common stock  |       | 6,764                  |       | 6,336 |   |
| Warrants to purchase  common stock |       | 5,059                  |       | 7,183 |   |

 

**NOTE 13.**   INCOMETAXES

**We haverecorded tax provisions of approximately $217,000 and $252,000, respectively,for the three and nine months ended September 30, 2006, related to federalalternative minimum taxes and the tax effect of the net proceeds received onthe sale of products to Mayne Pharma. We recorded no tax provision for the ninemonths ended September 30, 2005.**

**NOTE 14.**   RECENTACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Boardissued Financial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation ofStatement of Financial Accounting Standards No. 109, “Accounting for IncomeTaxes.” FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in an enterprise’s tax return. This interpretation alsoprovides guidance on the derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition of tax positions. Therecognition threshold and measurement attribute is part of a two step taxposition evaluation process prescribed in FIN 48. FIN 48 is effective after thebeginning of an entity’s first fiscal year that begins after December 15, 2006.We are currently evaluating the impact of FIN 48 to our consolidated financialstatements.

19

----

**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*You should read the following discussion together withour condensed consolidated financial statements and related notes includedelsewhere in this report. The results discussed below are not necessarilyindicative of the results to be expected in any future periods. 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-lookingstatements. Forward-looking statements provide our current expectationsor forecasts of future events. In particular, these statements includestatements such as: our estimates about becoming profitable; the percentage ofroyalties we expect to earn on Dacogen sales under our agreement with MGI; ourforecasts regarding our research and development expenses; and our statementsregarding the sufficiency of our cash to meet our operating needs. Our actualresults could 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; and ourability to launch and commercialize our products. Certain unknown or immaterialrisks and uncertainties can also affect our forward-looking statements.Consequently, no forward-looking statement can be guaranteed and youshould not rely on these forward-looking statements. For adiscussion of the known and material risks that could affect our actual results,please see the “Risk Factors” section of this report. We undertake noobligation to update any forward-looking statements, whether as a result of newinformation, future events or otherwise. Readers should carefully review theRisk Factors section below as well as other reports or documents we file fromtime to time with the Securities and Exchange Commission.*

**Overview**

We are a pharmaceuticalcompany dedicated to the discovery, acquisition, rapid development andcommercialization of therapies for solid tumors, hematological malignancies andblood disorders. In addition, we have a number of aurora-A and tyrosine kinaseinhibitors and DNA methyltransferase preclinical products under development. 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. Ourrecent development efforts have been focused on three key compounds:  Dacogen, Orathecin, and Nipent.

*Dacogen.**  *Our originalnew drug application (“NDA”) for Dacogen was accepted for filing by the UnitedStates Food and Drug Administration (“FDA”) on December 31, 2004. OnSeptember 1, 2005, we received an Approvable Letter for Dacogen from theFDA, which provided that Dacogen was approvable pending the FDA’s review of arequested analysis of the transfusion requirements of patients enrolled in thecompleted Phase III trial, submission of certain other information, andcompletion of labeling discussions. We completed the collection and analysis ofthe data requested by the FDA and submitted our response to the ApprovableLetter on November 15, 2005. On December 15, 2005, the FDA acceptedour resubmission as a complete response to the Approvable Letter. OnMay 3, 2006, the FDA approved Dacogen for the treatment of patients withmyelodysplastic syndromes (“MDS”).

In September 2004, we executed a definitiveagreement granting MGI PHARMA Inc. (“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 $32.5 million of these milestones, including$20.0 million upon first commercial sale of Dacogen in the 

20

----

U.S. in May 2006. In accordance with our agreement withMGI, we are entitled to receive a royalty on worldwide net sales starting at20% and escalating to a maximum of 30%. During the three and nine month periodsended September 30, 2006, we recorded royalty revenue of $1.0 million.Because we do not have sufficient ability to accurately estimate Dacogen sales,we recognize royalty revenue on a cash basis when we receive it from MGI.

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

*Orathecin.**  *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. Afterfurther discussions and feedback with both the FDA and consultants helping usdialog with the FDA, we determined the package for Orathecin was not sufficientto gain approval in the United States and we withdrew the NDA inJanuary 2006. In April 2006, we announced that we had completed thepre-specified interim analysis of the Orathecin Phase II clinical trialstudying Orathecin plus gemcitabine as first-line combination therapy foradvanced pancreatic cancer patients who have not undergone chemotherapy. Themulti-center trial enrolled 39 patients with primary advanced pancreaticcancer. This protocol included a prospectively defined interim analysis toestimate median survival. The analysis resulted in an estimated median survivalof 6.0 months, with a Kaplan-Meier one year survival to be 27%. Although theestimated one year survival is encouraging compared to similar studies in thisindication, the study did not meet the pre-specified threshold for mediansurvival in order to proceed to a phase III randomized study. The safetyprofile for this patient group was very similar to prior studies of Orathecinas a single agent or in combination with gemcitabine. The study will remain closedto enrollment, but open for patient follow-up. We are working with clinicaladvisors, investigators, and potential partners to evaluate the best optionsfor Orathecin that will maximize the product’s potential to help patients inneed and realize its commercial value for our stockholders.

In July 2004, we submitted a MarketingAuthorization Application (“MAA”) to the European Medicines Agency (“EMEA”)seeking approval of Orathecin. Based on extensive discussions with the EMEA, wewithdrew the MAA in January 2006.

*Nipent.**  *Nipent isapproved by the FDA and EMEA for the treatment of hairy cell leukemia and wasmarketed by us in the United States and is being distributed in Europe.

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

During the transition period, we are continuing toship vials of Nipent to Wyeth for sale and distribution in various countries inEurope. On a monthly basis, Wyeth has remitted to SuperGen an additionalamount, defined in the amended and restated supply agreement as the “netprofit,” based on 

21

----

Wyeth’s sales of Nipent.The net profit has been computed as Wyeth’s invoiced net sales, less theproduct acquisition cost from SuperGen, less 5% transfer fee and less 5%distribution fee. Recurring remittances to SuperGen may be adjusted by anyWyeth invoiced trade receivable that is overdue by 60 days or more. Based ondiscussions with Wyeth, we believe that Wyeth’s ability to collect theseamounts is reasonably assured. At the time distribution rights transfer, wewill be required to repurchase any unsold inventory held by Wyeth with a shelflife greater than 12 months and limited amounts of packaging materials.

On August 22, 2006, we closed our transactionwith Mayne Pharma (USA), Inc. (“Mayne”), whereby Mayne acquired the NorthAmerican rights to Nipent and SurfaceSafe® cleaning system. Pursuant to theAsset Acquisition Agreement, we received cash proceeds of $13,395,000 uponclosing of the transaction. In addition to the initial payment and holdbacks,we may receive annual deferred payments totaling $14,140,000 over the next fiveyears based on achievement of specific sales targets. These annual deferred paymentsmay be accelerated under certain circumstances, including a change of controlat Mayne.

*OtherProducts.**  *Ourportfolio of other products includes Partaject-delivered busulfan. Wehave received regulatory approval to market Mitozytrex (mitomycin for injection)for use in the therapy of disseminated adenocarcinoma of the stomach orpancreas in proven combinations with other approved chemotherapeutic agents andas palliative treatment when other modalities have failed. Moreover, we holdUnited States sales and marketing rights to the cancer vaccine Avicine. We arecontinually evaluating our product portfolio to determine whether it isappropriate for us to dedicate the resources needed to commercialize theseproducts ourselves or whether we would be better served selling or licensingthe rights to develop these products to third parties.

*MontigenAcquisition.**  *On January 27, 2006, we announcedthat we had entered into a definitive agreement to acquire MontigenPharmaceuticals, Inc. (“Montigen”), a privately-held oncology-focused drugdiscovery and development company headquartered in Salt Lake City, Utah.Montigen’s assets include its research and development team, a proprietary drugdiscovery technology platform and optimization process, CLIMBTM, and late-stagepre-clinical compounds targeting aurora-A kinase and members of the tyrosinekinase receptor family. We expect one of the Montigen compounds to be thesubject of a pre-IND meeting with the FDA later this year.

To date, our product revenues have been limited andare derived primarily from sales of Nipent, which was marketed in the UnitedStates and is being distributed in Europe for the treatment of hairy cellleukemia. Most of our products are still in the development stage, and we willrequire substantial additional investments in research and development,clinical trials, regulatory and in sales and marketing activities tocommercialize current and future product candidates. Conducting clinical trialsis a lengthy, time-consuming, and expensive process involving inherentuncertainties and risks, and our studies may be insufficient to demonstratesafety and efficacy to support FDA approval of any of our product candidates.

As a result of our substantial research anddevelopment expenditures and minimal product revenues, we have incurredcumulative losses of $359.0 million through September 30, 2006, and havenever generated enough funds through our operations to support our business. Weexpect to continue to incur operating losses at least through 2007.

Ultimately, our ability tobecome profitable will depend upon a variety of factors, including regulatoryapprovals of our products, the timing of the introduction and market acceptanceof our products and competing products, MGI’s success in commercializing Dacogen,the launch 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 orsell certain of our assets, and it is likely the price of our stock woulddecline precipitously.

22

----

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

Duringthe third quarter of 2006 a previously unrecorded United Kingdom (“UK”) payrollrelated liability was identified. We estimate this liability aggregates$930,000 as of September 30, 2006, related to withholding and otherpersonal income tax, penalties and interest involving a former SuperGenemployee who was a United States citizen and worked in the UK. The liabilityoriginated during the years 2002—2006 and was identified as a result of  recent disclosures made by a UK employee toour auditors. We determined that $795,000 of the liability relates to periodsprior to 2006. The following table illustrates the amount of the error thatoriginated in each of the years between 2002 and 2005 (in thousands):

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

 

Weadopted the provisions of Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements”**(“SAB 108”).Prior to the adoption of SAB 108, we quantified misstatements based on theamount of the error originating in the current year statement of operations(“rollover approach”). SAB 108 requires that in addition to considering theamount of the error originating in the current year statement of operations,the misstatement existing at each balance sheet date should also be considered,irrespective of the period of origin of the error (“iron curtain approach”). Wedo not believe that any of the amounts included in the table above are materialto the periods in which they originated using the rollover approach. However,using the iron curtain method upon adoption of SAB 108, we have determined thatthe quantitative cumulative error aggregating approximately $795,000 thatexisted as of December 31, 2005 is material to the 2005 financial statements.As permitted when first applying the guidance in SAB 108, prior periods werenot restated. The cumulative effect of the initial application of SAB 108 forquantification and correction of the error is included in the carrying amountsof liabilities and accumulated deficit as of September 30, 2006 in theaccompanying balance sheet. The impact of this cumulative effect adjustment isan increase to accrued payroll and employee benefits of $795,000 and anincrease to accumulated deficit of $795,000 as of January 1, 2006. Thefollowing table illustrates the effect of the cumulative effect adjustmentrecorded as of January 1, 2006 (in thousands):

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

 

The $135,000 of theliability that originated during 2006 is included in selling, general andadministrative expense for the three and nine-month periods endedSeptember 30, 2006. $45,000 and $62,000 of the amount recorded during thequarter ended September 30, 2006 originated during the quarters endedJune 30, 2006 and March 31, 2006, respectively. We do not believe thatthese amounts are material to the quarters in 2006 in which they originated andshould have been reported, nor do we believe the prospective correction of suchamounts during the quarter ended September 30, 2006 is material to ourconsolidated operating results for such quarter.

**Critical AccountingPolicies**

Our management discussion and analysis of ourfinancial condition and results of operations is based upon our condensedconsolidated financial statements, which have been prepared in accordance with 

23

----

accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and reported disclosures.On an on-going basis, we evaluate our estimates, including those related torevenue recognition, intangible assets, valuation of investments and derivativeinstruments. We base our estimates on historical experience and on variousother assumptions that we believe are reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

Our significant accountingpolicies are more fully disclosed in Note 1 to our consolidated financialstatements included in our 2005 Annual Report on Form 10-K. However,some of our accounting policies are particularly important to the portrayal ofour financial position and results of operations and require the application ofsignificant judgment by our management. We believe the following criticalaccounting policies, among others, affect our more significant judgments andestimates used in the preparation of our condensed consolidated financialstatements.

*Stock-BasedCompensation*

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

The fair value of each stock award is estimated on thegrant date using the Black-Scholes option-pricing model based on assumptionsfor volatility, risk-free interest rates, expected life of the option, and dividends(if any). Expected volatility is determined based on a blend of historicalvolatility and implied volatility of our common stock based on the period oftime corresponding to the expected life of the stock options. The expected lifeof our stock options is based on our historical data and represents the periodof time that stock options granted are expected to be outstanding. Therisk-free interest rate is based on the U.S. Treasury yield curve ineffect at the time of grant commensurate with the expected life assumption.

We are using the straight-line attribution method torecognize stock based compensation expense. The amount of stock-basedcompensation recognized during a period is based on the value of the portion ofthe awards that are ultimately expected to vest. SFAS 123R requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. The term“forfeitures” is distinct from “cancellations” or “expirations” and representsonly the unvested portion of the surrendered option. We have applied an annualforfeiture rate of 12.02% to all unvested options as of September 30,2006. This analysis will be re-evaluated quarterly and the forfeiture rate willbe adjusted as necessary. Ultimately, the actual expense recognized over thevesting period will only be for those shares that vest.

As of September 30,2006, there was $4,032,000 of total unrecognized compensation cost related tounvested stock-based awards. This cost is expected to be recognized over aweighted average period of 2.63 years. We expect approximately 1,208,000in unvested options to vest at some point in the future. Options expected tovest is calculated by applying an estimated forfeiture rate to the unvestedoptions.

24

----

*Revenue Recognition*

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

*EarlyPayment Discounts—**The*reserve represents an estimatefor the portion of our accounts receivable trade customers that qualify for ourearly payment discounts program. For qualified customers we offer payment termsof 2%-45, net 46 days. In prior years, the early payment discounts takenwere not material and were recorded upon receipt of customer payments. Due toincreasing levels of product revenue and continued utilization of the earlypayment discounts program by our eligible accounts receivable trade customersduring 2005, we determined the need to establish a reserve for the program tobetter match and record estimated early payment discounts that will be takenwith the corresponding product revenue. The reserve for early payment discountsis charged to product revenue. The reserve is calculated by (i) analyzinghistorical customer payment discount activity and trends,(ii) consideration of payments terms for any existing contractualcommitments, and (iii) other internal or external factors including(a) changes in buying patterns by customers and (b) changingconditions in the financial strength of our customers.

*ProductReturns—**The* reserve represents an estimatefor the portion of product revenue that may be returned in the future forcredit. Products can be returned for credit only under limited circumstancessuch as expiring product returned under backorder or out-of-stockcircumstances. The reserve for product returns is charged to product revenue.The reserve is calculated by (i) analyzing historical product returnactivity and trends, (ii) consideration of product returns within theframework of any relevant contractual commitments, and (iii) otherinternal or external factors including (a) inventory held by wholesalersand distributors and the remaining shelf life of their inventory, (b) ourability to continue supplying product to our customers, (c) actual andanticipated sales activity based on our internal estimates and(d) independent product usage information.

*ProductExchanges—**The* reserve represents an estimatefor the portion of product shipments that may be exchanged in the future.Product exchanges generally consist of damaged product, shortages existing uponproduct receipt by the customer or product that is returned within three monthsafter product expiration. The cost for product exchanges is included in cost ofproduct revenue. The reserve is calculated by (i) analyzing historicalproduct exchange activity and trends, (ii) consideration of productexchanges within the framework of any related contractual commitments, and(iii) other internal or external factors including (a) inventory heldby wholesalers and distributors and the remaining shelf life of theirinventory, (b) changes in actual and anticipated sales based on ourinternal estimates and (c) any independent product usage information.

*Chargebacks—**The* reserverepresents an estimate for the portion of product revenue that may be subjectto our chargeback program. We market our products primarily to wholesalers anddistributors. The wholesalers and distributors then sell to indirect customers,which include hospitals, clinics, government agencies, pharmacies, physicianoffices, managed care organizations, nursing homes, pharmacy benefit managementcompanies, and group purchasing organizations. In addition to our existing chargebackprograms which include rebates and governmental transactions, we expanded ourchargeback program during 2004 and entered into agreements with certainindirect customers to establish contract pricing for our primary product,Nipent. When the product is purchased by a qualifying indirect customer fromthe wholesaler or distributor a chargeback is generated. Chargebacks are themechanism for reimbursing the wholesaler or distributor for the differencebetween our retail price to the wholesaler or distributor and the indirectcustomer’s contract price. There may be a time lag of one to six months betweenthe original sale 

25

----

to the wholesaler ordistributor and the subsequent sale to the indirect customer generating thechargeback. In previous years, chargebacks were charged to revenue when issued.Nipent sales in the U.S. increased from $11.6 million in 2004 to $15.1 millionin 2005, broadening product revenue subject to our expanded chargeback program.Due to the increase in product revenue subject to the expanded chargebackprogram, we determined the need to establish a reserve for chargebacks in orderto better match and record our estimated financial exposure for chargebackswith the corresponding product revenue. The reserve for chargebacks is chargedto product revenue. The reserve is calculated by (i) analyzing historicalchargeback activity and trends, (ii) consideration of our obligationswithin the framework of existing, expiring and new contractual commitments, and(iii) other internal or external factors including (a) actual andanticipated purchasing trends by our wholesalers and distributors andqualifying indirect customers, (b) expectation and timing of product priceincreases and (c) anticipated changes in the industry, customer base orgovernment regulation that may impact the use, structure or administration ofchargeback programs.

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

| **Rollforward Activity**                  | ** ** | ** ** | ** ** | **Early  Payment  Discounts** | ** ** | **Product  Returns** | ** ** | **Product  Exchanges** | ** ** | **Chargebacks** | ** ** |
|------------------------------------------------|------------|------------|------------|-------------------------------|------------|----------------------|------------|------------------------|------------|-----------------|------------|
| Balances at December 31, 2005             |       |       | $          | 120                           |       |                 |       | $                      | 150        |            |       |   | $ | 12 |   |   |   | $ | 500 |   |   |
| Provision  (credit) made in the current period |       |       | 201        |                          |       |                 | 174        |                   |       |            | (7         | ) |   |   | 809 |   |   |
| Actual returns or credits in current period    |       |       | (299       | )                             |       |                 | (252       | )                      |       |            | (3         | ) |   |   | (1,064 | ) |   |
| Balances at September 30, 2006            |       |       | $          | 22                            |       |                 |       | $                      | 72         |            |       |   | $ | 2 |   |   |   | $ | 245 |   |   |

 

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

We have accounted for our $2.1 million payment toWyeth in June 2006 as Prepaid distribution and marketing rights, which isbeing amortized against revenue over 10 months, equaling the terminationacceleration period of June 2006 through March 2007.  The amortization of $840,000 through the ninemonths ended September 30, 2006 has been reflected as a reduction ofproduct revenue. Proceeds from our initial product shipments to Wyeth has beendeferred and will be recognized as revenue (as will related cost of revenue)when the product is delivered to the end customer by Wyeth. Under the terms ofour amended agreement with Wyeth, we receive an additional amount of net profitbased on Wyeth’s sales of Nipent. During the three months ended September 30,2006, we received $446,000 of net profit, which was included in net productrevenue.

In accordance with our license agreement with MGI, wereceived a milestone payment and recorded milestone revenue of $20.0 million inthe nine months ended September 30, 2006. MGI is required to pay usroyalties of 20% to 30% of net Dacogen sales within 45 days after the end ofeach calendar quarter. During the nine month period ended September 30,2006, we recorded royalty revenue of $1.0 million. Because we do not havesufficient ability to accurately estimate Dacogen sales, we recognize royaltyrevenue on a cash basis when we receive it from MGI. In accordance with ourlicense agreement with MGI, we are entitled to receive 50% of any payments MGIreceives as a result of any sublicenses. We received $5.0 million, 50% of the$10 million upfront payment MGI received, and, as a result of both the originalagreement with MGI and a sublicense with Cilag GmbH, may receive up to $23.75 millionin future milestone payments as they are achieved for Dacogen globally.

26

----

We received initial cash proceeds from the AssetAcquisition Agreement with Mayne Pharma of $13,395,000. From the initialproceeds we have deducted the value of net assets delivered to Mayne, includinginventory, prepaid expenses, and manufacturing equipment, and have computed anet gain of $12,235,000. However, due to the uncertainty regarding the priceprotection exposure noted in Note 7, we have deferred the entire net gain as ofSeptember 30, 2006.

*Goodwill andIntangible Assets*

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

*Valuation of Investmentsin Financial Instruments*

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

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

*DerivativeInstruments*

In connection with ourJune 2003 convertible debt transaction, we issued to the note holderswarrants to purchase 2,634,211 shares of common stock of AVI at $5.00 pershare. In January 2006, 300,000 of these warrants were exercised. As ofSeptember 30, 2006, we owned 2,334,211 shares of AVI to cover theremaining outstanding warrants. These warrants are considered to be aderivative and have been recorded on the balance sheet at estimated fair value.The accounting for derivatives is complex, and requires significant judgmentsand estimates involved in determining the estimated fair value in the absenceof quoted market values. These estimates are based on valuation methodologiesand assumptions deemed appropriate in the circumstances. The estimated fairvalue of the warrants is based on various assumptions input into the Black-Scholespricing model. These assumptions include the estimated market volatility andinterest rates used in the determination of fair value. The use of differentassumptions may have a material effect on the estimated fair value amount andthe results of operations. 

27

----

**Results ofOperations**

*Three months ended September 30, 2006 compared tothree months ended September 30, 2005:*

| ** **                       | ** ** | **Three months ended  September 30,** | ** ** | **Change**                                         | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Revenues**                     | ** ** | ** **                                           | ** ** | **    2006   ** | ** ** | **    2005   ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)**                 | ** ** |
| Net product  revenue             |       |                                                 | $          | 2,228                                              |       |   |   | $ | 5,457 |   |   | $ | (3,229 | ) |   | (59.2 | )% |   |
| Development and  license revenue |       |                                                 | 5,064      |                                               |       |   | 3,168 |   |   | 1,896 |   |   | 59.9 |   |   |
| Royalty revenue                  |       |                                                 | 1,043      |                                               |       |   | — |   |   | 1,043 |   |   | 100.0 |   |   |
|                                  |            |                                                      |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The decrease in net product revenue for the three monthsended September 30, 2006 was due primarily to the sale of our NorthAmerican rights to Nipent and Surface Safe to Mayne Pharma effective onAugust 22, 2006.

Development and license revenue relates to our licenseagreement entered into with MGI in September 2004. For the three monthsended September 30, 2006, we received $5,000,000 from MGI, whichrepresented 50% of the amount MGI received as a result of sublicensing Dacogenin Europe, and $64,000 in reimbursable costs. Development and license revenue forthe three months ended September 30, 2005 included $2,476,000 related tothe amortization of deferred revenue in connection with the upfront paymentreceived from MGI, and $692,000 related to reimbursement of Dacogen developmentand allocated overhead costs.

Duringthe three months ended September 30, 2006, we recorded royalty revenue of$1,043,000 on Dacogen sales for the second quarter of 2006. MGI is required topay us royalties of 20% to 30% of net Dacogen sales within 45 days after theend of each calendar quarter. Because we do not have sufficient ability toaccurately estimate Dacogen sales, we recognize royalty revenue on a cash basiswhen we receive it from MGI. Dacogen was approved for sale by the FDA inMay 2006.

| ** **                                      | ** ** | **Three months ended  September 30,** | ** ** | **Change**                                         | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Costs and operating expenses** | ** ** | ** **                                           | ** ** | **   2006    ** | ** ** | **   2005    ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**                 | ** ** |
| Cost of product  revenue                        |       |                                                 | $          | 482                                                |       |   |   | $ | 736 |   |   | $ | (254 | ) |   | (34.5 | )% |   |
| Research and  development                       |       |                                                 | 4,651      |                                               |       |   | 3,571 |   |   | 1,080 |   |   | 30.2 |   |   |
| Selling, general and  administrative            |       |                                                 | 6,753      |                                               |       |   | 6,761 |   |   | (8 | ) |   | (0.1 | ) |   |
|                                                 |            |                                                      |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of product revenue as a percentage of net productrevenue was 22% in the third quarter of 2006 compared to 13% in the same periodin 2005. The increase for the three months ended September 30, 2006 wasprimarily due to a write off of $75,000 to cost of product revenue for a failedmanufacturing batch of mitomycin. Current margins may not be indicative offuture margins due to possible variations in product mix, average sellingprices, manufacturing costs, and the sale of our Nipent and Surface Safeproducts to Mayne.

The increase in research and development expenses wasdue to higher drug discovery research costs associated with the newly acquiredMontigen facility in Salt Lake City, Utah and employee stock compensation costsrecorded as a result of the implementation of SFAS 123R, offset by lowerclinical research and supply costs related to Orathecin, Dacogen, andNipent.  We conduct research internally andalso through collaborations with third parties, and we intend to maintain ourstrong commitment to our research and development efforts in the future. Ourresearch and development activities consist primarily of clinical developmentand the related advancement of our existing product candidates through clinicaltrials. Conducting clinical trials is a lengthy, expensive and uncertainprocess. Completion of clinical trials may take several years or more. Thelength of time generally varies substantially according to the type, 

28

----

complexity, novelty andintended use of the product candidate. Our clinical trials may be suspended atany time if we or the FDA believe the patients participating in our studies areexposed to unacceptable health risks. We may encounter problems in our studieswhich will cause us or the FDA to delay or suspend the studies. Because ofthese uncertainties, we cannot predict when or whether we will successfullycomplete the development of our product candidates or the ultimate productdevelopment cost.

Thedecrease in selling, general and administrative expenses for the three monthsended September 30, 2006 relates primarily to lower costs associated withsales and marketing programs due to the sale of Nipent and Surface Safe toMayne in August 2006, offset by higher expenses relating to the recordingof stock compensation expense as a result of the implementation of SFAS 123R,and higher legal and accounting consulting expenses.

| ** **                           | ** ** | **Three months ended  September 30,** | ** ** | **Change**                                               | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **Other income (expense)** | ** ** | ** **                                           | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)**                 | ** ** |
| Interest income                      |       |                                                 | $          | 796                                                      |       |   |   | $ | 444 |   |   |   | $ | 352 |   |   |   | 79.3 | % |   |
| Change in valuation of  derivatives  |       |                                                 | 654        |                                                     |       |   | (79 | ) |   |   | 733 |   |   |   | 927.8 |   |   |
|                                      |            |                                                      |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in interest income was due to higheravailable cash and marketable securities balances and an increase in interestrates for the three months ended September 30, 2006, compared to the sameperiod in 2005.

As part of ourJune 2003 convertible debt transaction, we issued to the note holderswarrants to purchase 2,634,211 shares of AVI at $5.00 per share. The warrantsissued in the transaction represent a derivative instrument and are revaluedeach quarter using the Black-Scholes pricing model. During the three monthsended September 30, 2006, the value of this derivative had declined by$654,000 primarily due to the declining life of the derivative, compared to anincrease of $79,000 during the three months ended September 30, 2005.

*Nine months ended September 30, 2006 compared tonine months ended September 30, 2005:*

| ** **                                | ** ** | **Nine months ended  September 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| **Revenues**                              | ** ** | ** **                                          | ** ** | **2006**   | ** ** | **2005** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**                | ** ** |
| Net product  revenue                      |       | $                                                   | 9,096      |       | $          | 10,096 |   | $ | (1,000 | ) | (9.9 | )% |
| Development and  license revenue          |       | 25,064                                              |       | 10,110     |       | 14,954 |   | 147.9 |   |
| Royalty revenue                           |       | 1,043                                               |       | —     |       | 1,043 |   | 100.0 |   |
| Distribution agreement  and other revenue |       | —                                              |       | 757        |       | (757 | ) | (100.0 | ) |
|                                           |            |                                                     |            |            |            |  |  |  |  |  |  |  |  |  |

 

The decrease in net product revenue for the ninemonths ended September 30, 2006 was due primarily to the sale of our NorthAmerican rights to Nipent and Surface Safe to Mayne Pharma effective onAugust 22, 2006.

Development and license revenue relates to our licenseagreement entered into with MGI in September 2004. For the nine monthsended September 30, 2006, we recognized milestone revenue of $20,000,000earned upon first commercial sales of Dacogen by MGI in May 2006, wereceived $5,000,000 from MGI representing 50% of the amount MGI received as aresult of sublicensing Dacogen in Europe, and recorded $64,000 in reimbursablecosts. For the nine months ended September 30, 2005, development andlicense revenue included $7,429,000 related to the amortization of deferredrevenue in connection with the upfront payment received from MGI, and$2,681,000 related to reimbursement of Dacogen development and allocatedoverhead costs.

29

----

During the nine months ended September 30, 2006,we recorded royalty revenue of $1,043,000 representing royalties on Dacogensales for the second quarter of 2006. MGI is required to pay us royalties of20% to 30% of net Dacogen sales within 45 days after the end of each calendarquarter. Because we do not have sufficient ability to accurately estimateDacogen sales, we recognize royalty revenue on a cash basis when we receive itfrom MGI.

Distributionagreement and other revenue for the nine months ended September 30, 2005related to the termination of our Nipent distribution agreement with AbbottLaboratories. Upon signing this agreement in 1999, we received $5.0 millionfrom Abbott, which was recorded as deferred revenue and was being amortizedover a five-year period. In February 2005, we paid Abbott $1,500,000 toterminate this agreement, and this amount was charged against the unamortizedbalance of deferred revenue of $1,667,000. The remaining $167,000 was recordedas distribution agreement revenue in the nine months ended September 30,2005 as a result of the termination of the distribution agreement. Theremaining $590,000 in revenue relates to the transfer agreement with AmericanPharmaceutical Partners, Inc. whereby we transferred the Abbreviated New DrugApplication and all rights, title, and interest in our generic daunorubicin. Wehad no similar revenue during the nine months ended September 30, 2006.

| ** **                                      | ** ** | **Nine months ended  September 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| **Costs and operating expenses** | ** ** | ** **                                          | ** ** | **2006**   | ** ** | **2005** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**                | ** ** |
| Cost of product  revenue                        |       | $                                                   | 1,877      |       | $          | 1,736 |   | $ | 141 |   |   | 8.1 | % |   |
| Research and  development                       |       | 11,509                                              |       | 11,585     |       | (76 | ) |   | (0.7 | ) |   |
| Selling, general  and administrative            |       | 19,312                                              |       | 20,159     |       | (847 | ) |   | (4.2 | ) |   |
| Acquired in-process  research and development   |       | 16,318                                              |       | —     |       | 16,318 |   |   | 100.0 |   |   |
|                                                 |            |                                                     |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

Cost of product revenue as a percentage of net productrevenue was 21% in the first half of 2006 compared to 17% in the same period in2005. The increase for the nine months ended September 30, 2006 wasprimarily due to write offs of $239,000 to cost of product revenue for threefailed manufacturing batches of mitomycin. Current margins may not beindicative of future margins due to possible variations in product mix, averageselling prices, manufacturing costs, and the sale of our Nipent and SurfaceSafe products to Mayne.

The decrease in research and development expenses wasdue to lower clinical study and clinical supply costs for Orathecin andDacogen, as those clinical studies have wound down after the completion of ourFDA and European submissions during the latter half of 2004, offset by drugdiscovery research costs associated with the newly acquired Montigen facilityin Salt Lake City, Utah and employee stock compensation costs recorded as aresult of the implementation of SFAS 123R. We conduct research internally andalso through collaborations with third parties, and we intend to maintain ourstrong commitment to our research and development efforts in the future. Ourresearch and development activities consist primarily of clinical developmentand the related advancement of our existing product candidates through clinicaltrials. Conducting clinical trials is a lengthy, expensive and uncertainprocess. Completion of clinical trials may take several years or more. Thelength of time generally varies substantially according to the type,complexity, novelty and intended use of the product candidate. Our clinicaltrials may be suspended at any time if we or the FDA believe the patientsparticipating in our studies are exposed to unacceptable health risks. We mayencounter problems in our studies which will cause us or the FDA to delay orsuspend the studies. Because of these uncertainties, we cannot predict when orwhether we will successfully complete the development of our product candidatesor the ultimate product development cost.

The decrease in selling, general and administrativeexpenses for the nine months ended September 30, 2006 relates primarily toreduced expenses at EuroGen, our European subsidiary, lower costs associated 

30

----

with sales and marketingprograms due to the sale of Nipent and Surface Safe to Mayne inAugust 2006, offset by higher expenses relating to the recording of stockcompensation expense as a result of the implementation of SFAS 123R.

Acquiredin-process research and development expense recorded in the nine months endedSeptember 30, 2006 relates to the valuation of our acquisition of Montigenin April 2006. The value assigned to acquired in-process research anddevelopment represented the fair value of Montigen’s incomplete research anddevelopment programs that had not yet reached technological feasibility and hadno alternative future use as of the acquisition date. The value of the acquiredin-process research and development was determined by estimating the future netcash flows for the two compounds between 2006 and 2029 using a present valuerisk adjusted discount rate of 26%. This discount rate is a significantassumption and is based on our estimated weighted average cost of capitaladjusted upward for the risks associated with the projects acquired. Theprojected cash flows from the acquired projects were based on estimates ofrevenues and operating profits related to the projects considering the stage ofdevelopment of each potential product acquired, the time and resources neededto complete the development and approval of each product, the life of eachpotential commercialized product and associated risks including the inherentdifficulties and uncertainties in developing a drug compound, includingobtaining FDA and other regulatory approvals, and risks related to theviability of and potential alternative treatments in any future target markets.

| ** **                                                                                    | ** ** | **Nine months ended  September 30,** | ** ** | **Change**                             | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| **Other income (expense)**                                                          | ** ** | ** **                                          | ** ** | **   2006  ** | ** ** | **   2005  ** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                                                                                    | ** ** | **(Dollars in thousands)**                | ** ** |
| Interest income                                                                               |       | $                                                   | 1,794      |                                   | $          | 1,227 |   |   | $ | 567 |   |   |   | 46.2 | % |   |
| Gain on  disposition of investment in AVI BioPharma stock resulting from exercise of  warrant |       | 780                                                 |       | —                                 |       |   | 780 |   |   |   | 100.0 |   |   |
| Change in valuation of  derivatives                                                           |       | 1,327                                               |       | 421                                    |       |   | 906 |   |   |   | 215.2 |   |   |
|                                                                                               |            |                                                     |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in interest income was due to higheravailable cash and marketable securities balances and an increase in interestrates for the nine months ended September 30, 2006, compared to the sameperiod in 2005.

As part of our June 2003 convertible debttransaction, we issued to the note holders warrants to purchase 2,634,211shares of AVI at $5.00 per share. During the nine months endedSeptember 30, 2006, one of the warrant holders exercised 300,000 warrants.As part of this transaction, we received $1,500,000 in cash and transferred300,000 of the AVI Shares to the warrant holder.  We recognized a gain on disposition of theshares of $780,000, representing the difference between our $2.40 per shareadjusted cost basis of the shares and the exercise price.

The warrants issued in theJune 2003 convertible debt transaction represent a derivative instrumentand are revalued each quarter using the Black-Scholes pricing model. During thenine months ended September 30, 2006, the value of this derivative haddeclined by $1,327,000, primarily due to the declining life of the derivative.In nine months ended September 30, 2005, the derivative declined in valueby $421,000.

**Liquidity andCapital Resources**

Our cash, cash equivalents, and both short andlong-term marketable securities totaled $73,173,000 at September 30, 2006compared to $47,811,000 at December 31, 2005. In addition, we held2,384,211 shares of registered stock of AVI, most of which are held as securityfor the warrants we issued to convertible debt holders to purchase the2,334,211 AVI shares at $5.00 per share. The AVI shares had a market value 

31

----

of $8,679,000 atSeptember 30, 2006. The AVI shares are classified on the balance sheetunder non-current Restricted cash and investments, as well as Investment instock of related parties. 

Net cash provided by operating activities was$12,105,000 in the nine months ended September 30, 2006, and consistedprimarily of the net loss of $10,029,000, a cash option of $2,100,000 paid toWyeth for Nipent European distribution rights, and non-cash change in valuationof derivatives of $1,327,000, offset by non-cash stock compensation expense of$2,566,000, amortization of intangibles of $1,343,000, payment for acquiredin-process research and development expense of $16,318,000, a decrease inaccounts receivable of $4,137,000, and an increase in deferred revenue of$1,007,000. Net cash used in operating activities was $6,844,000 in the ninemonths ended September 30,2005, and consisted primarily of the net loss of $10,869,000, plus non-cashamortization of deferred revenue of $7,429,000 from the MGI payment received inSeptember 2004, $1,500,000 paid to Abbott to terminate our U.S. Nipentdistribution agreement, a decrease in accounts payable and other liabilities of$2,189,000, offset by a decrease in accounts receivable of $13,099,000,primarily due to the receipt of milestone and development funds from MGI.

Net cash provided by investing activities was$5,837,000 in the nine months ended September 30, 2006, which consisted of$13,395,000 in net proceeds from the sale of Nipent and Surface Safe to Mayneand proceeds of $1,500,000 from disposition of shares of AVI BioPharma as aresult of the exercise of warrants, offset by $8,693,000 related to theacquisition of the net assets of Montigen. Net cash provided by investingactivities was $16,450,000 in the nine months ended September 30, 2005, and consisted of $28,136,000 in proceedsfrom the sale or maturity of marketable securities, offset by $11,585,000 fromthe purchase of marketable securities.

Net cash provided by financing activities was$7,368,000 in the nine months ended September 30, 2006, and consisted of  proceeds from the exercise of stock optionsand warrants. Net cash provided by financing activities was $989,000 in the nine months ended September 30, 2005, and consisted of proceeds fromexercises of stock options.

We have financed our operations primarily through theissuance of equity and debt securities and the receipt of milestone payments inconnection with collaborative agreements. We believe that our current cash,cash equivalents, marketable securities and other investments will satisfy ourcash requirements through 2007. However, it is our intention to pursue additionalfinancing options, including the selling of additional shares of stock in apublic or private offering and/or exploring marketing partnership opportunitiesfor Orathecin and development activities resulting from the acquired researchoperation based in Salt Lake City, Utah.

In addition to the contractual obligations disclosedin Management’s Discussion and Analysis included in our annual report onForm 10-K for the year ended December 31, 2005, effectiveApril 4, 2006, the Company has $22.0 million in future contingentregulatory milestone payments due to the Montigen stockholders, which would bepayable in shares of SuperGen stock.

We believe that our needfor additional funding will increase in the future and that our continuedability to raise funds from external sources will be critical to our success.We continue to actively consider future contractual arrangements that wouldrequire significant financial commitments. If we experience currentlyunanticipated cash requirements, we could require additional capital muchsooner than presently anticipated. We may raise money by the sale of our equitysecurities or debt, or the exercise of outstanding warrants and stock optionsby the holders of such warrants or options. However, given uncertain marketconditions and the volatility of our stock price, we may not be able to sellour securities in public offerings or private placements at prices and on termsthat are favorable to us, if at all. We may also choose to obtain fundingthrough licensing and other contractual agreements. Such arrangements mayrequire us to relinquish our rights to our technologies, products or marketingterritories, or to grant licenses on terms that are not favorable to us. If wefail to obtain adequate funding in a timely manner, or at all, we will be 

32

----

forcedto scale 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 the end of 2007.

**Item 3.**                        Quantitativeand Qualitative Disclosures About Market Risk

Due to the short-term nature of our interestbearing assets, which consist primarily of certificates of deposit, U.S.corporate obligations, and U.S. government obligations, we believe that our exposureto interest rate market risk would not significantly affect our operations.

Our investment policy is tomanage our marketable securities portfolio to preserve principal and liquiditywhile maximizing the return on the investment portfolio. Our marketablesecurities portfolio is primarily invested in corporate debt securities with anaverage maturity of under one year and a minimum investment grade rating of Aor 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 are valued each period using the Black-Scholes method. OnSeptember 30, 2006, the value of the derivative had decreased to $490,000,based on 2,334,211 warrants still outstanding. As the fair value of the common stock of AVI has fluctuated significantlyin the past two years, the valuation of the derivative may have a significantimpact on our results of operations.

Weoperate primarily in the United States and all product sales are denominated inU.S. dollars. Accordingly, we do not have any significant exposure to foreigncurrency rate fluctuations.

**Item 4.**                        ControlsAnd Procedures

As of September 30, 2006, ourmanagement evaluated, with the participation of our chief executive officer andour chief financial officer, the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this quarterly report on Form10-Q. Based on this evaluation, our chief executive officer and our chieffinancial officer have concluded that due to the material weakness discussedbelow our disclosure controls and procedures are not effective to ensure thatinformation we are required to disclose in reports that we file or submit underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms. 

A material weakness is a controldeficiency, or combination of control deficiencies, that results in more than aremote likelihood that a material misstatement of our annual or interimfinancial statements will not be prevented or detected. Our management’sassessment of our internal control over financial reporting performed duringthe preparation of our condensed consolidated financial statements for theperiod ending September 30, 2006 identified the following material weakness inour internal control over financial reporting:

We have determined that amaterial weakness exists in the Company’s system of internal control overfinancial reporting related to the monitoring of our foreign locations’ processfor identifying and timely addressing potential tax compliance issues that mayresult in a financial statement impact. In October 2006, an adjustment wasidentified for an unpaid payroll and national insurance tax obligation,including estimated interest and penalties, related to our 95% owned UKsubsidiary, EuroGen Pharmaceuticals. The adjustment was identified as a resultof recent disclosures made by a UK employee to our auditors. The adjustmentemanated from work performed in the UK by a U.S. employee, who was Presidentand CEO of EuroGen. This employee’s work in the UK triggered UK residencyrequirements over a number of years 

33

----

from2002 through 2006 by exceeding permissible thresholds and subjecting theemployee and EuroGen to certain payroll and national insurance tax obligations.There have not been nor are there currently any other U.S. national employeesof the Company working in the UK.

Subsequent to September 30, 2006, in response to the material weakness ininternal controls described above, we took measures to establish additionalpolicies and procedures to monitor our European locations to evaluate anddetermine that similar obligations are properly identified, communicated andrecorded. These measures include expanding oversight of our European operationsimpacting cash, legal, human resources, and regulatory activities; augmentingour staff in Europe to oversee business operations; re-issuance of theCompany’s Code of Business Conduct and Ethics to all U.S. and UK employees. 

(b)         Changes ininternal control over financial reporting. 

Except as discussed above, therehave been no changes in our internal control over financial reporting thatoccurred during the period covered by this Quarterly Report on Form 10-Q thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

34

----

**SUPERGEN, INC.**

**PART II -OTHER INFORMATION**

**Item 1A.**                RiskFactors

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

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

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

*Dacogen may not becommercially successful.*

Even though Dacogen has recently been approved in theUnited States and even if it receives regulatory approval in Europe at a futuredate, patients and physicians may not readily accept it, which would result inlower than projected sales and cause substantial harm to our business throughthe receipt of lower royalty revenue from MGI. In addition, pursuant to ourlicense agreement with MGI, we are expecting to receive payments from MGI inconnection 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.

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

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

In July 2006, MGI announced that it hadsublicensed Dacogen to Cilag GmbH, a Johnson & Johnson company,granting exclusive development and commercialization rights in all territoriesoutside North America. We received 50% of the $10 million upfront payment and,as a result of both the original agreement with MGI and this sublicense withCilag GmbH, may receive up to $23.75 million in future milestone payments asthey are achieved for Dacogen sales globally. Janssen-Cilag companies will beresponsible for conducting regulatory and commercial activities related toDacogen in all territories outside North America, while MGI retains allcommercialization rights and responsibility for all activities in the UnitedStates, Canada and Mexico. However, if Dacogen is never approved in Europe, wewill not receive any of the expected royalty payments for commercial sales byJanssen-Cilag and our business will be harmed.

*If the proposedsale of Nipent to Mayne Pharma is not consummated, our business may suffer.*

We are currently negotiating an agreement to sell theworldwide rights (excluding North America) to Nipent to Mayne Pharma (USA) Inc.We will expend significant efforts on signing and closing this transaction.Such efforts are costly from both a personnel and financial perspective,distract key personnel from their ordinary responsibilities, and may or may notultimately result in the consummation of the transaction. The signing and closingof the transaction is subject to numerous variables, some of which are beyondour control. If the transaction is not consummated for any reason, ourcustomers and suppliers may question our commitment to continue to develop andcommercialize the product and cease doing business 

35

----

with us. Failure to sign,and ultimately close, the transaction may negatively affect our financialresults, investor confidence, and ultimately our stock price.

*If EuroGen cannot set up the infrastructure todistribute and sell Nipent in Europe in a timely manner, our business will beharmed.*

Effective June 1, 2006, we amended our supply anddistribution agreement with Wyeth to provide for the termination ofdistribution of Nipent by Wyeth and transition the distribution to EuroGen.During the transition period, which is expected to be completed byDecember 1, 2006, EuroGen will work to set up the infrastructure necessaryto sell and distribute Nipent throughout Europe. Wyeth will determine, in itssole discretion, whether and when the appropriate infrastructure is in placeand the distribution can be fully transitioned. EuroGen may not complete theset up by December 1, 2006, and even if this timing is met, Wyeth may notapprove of it. If the infrastructure is not complete and/or approved byDecember 1, 2006, we will have to negotiate with Wyeth to extend thetransition period. If Wyeth agrees to extend, the distribution and transferfees payable to Wyeth increase from 5% to 20%, which will have an adversefinancial impact on us. If Wyeth does not extend the transition period, EuroGenwill be unable to sell and distribute Nipent and our revenues with respect tosales in Europe will cease unless and until Wyeth approves of the distributioninfrastructure.

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

In August 2006 wesold the North American rights to Nipent and Surface Safe to Mayne Pharma(USA), Inc. for a total aggregate consideration of approximately $34.0million. $5.0 million of that aggregate amount is a supply holdback, and Mayneis not obligated to release this holdback to us until our Nipent manufacturerhas been qualified and approved by the FDA. We cannot control or influence thisapproval process. In addition, over $14.0 million of the aggregateconsideration will not be paid to us unless and until Mayne achieves specifiedtargets for sales of Nipent, over the next five years. Achievement of thesesales targets are beyond our control. If the conditions for the release of thesupply holdback are not met, and/or we are not entitled to the $14.0 million ofdeferred payments, we will not have received full value for Nipent. If we arenot able to sell our revenue generating and otherwise valuable assets for fullvalue, our financial condition and business will be harmed.

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

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

Since inception, we have funded our research anddevelopment activities primarily from private placements and public offeringsof our securities, milestone payments and revenues generated primarily fromsales of Nipent. The North American rights to Nipent were recently sold toMayne Pharma, and we have just entered into an agreement with Mayne to sell therights to Nipent in the rest of the world. Our substantial research anddevelopment expenditures and limited revenues have resulted in significant netlosses. We have incurred cumulative losses of $359.0 million from inceptionthrough September 30, 2006, and our products have not generated sufficientrevenues to support our business during that time. We expect to continue toincur substantial operating losses at least through 2007 and may never achieveprofitability.

Whether we achieveprofitability depends primarily on the following factors:

·       the successfulcommercialization of Dacogen in North America by MGI;

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

36

----

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

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

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

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

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

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

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

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

Our products and product candidates, even ifsuccessfully developed and approved, may not generate sufficient or sustainablerevenues to enable us to achieve or sustain profitability.

*We will require additional funding to expand ourproduct pipeline, strengthen our commercialization efforts and expand ourEuropean operations, and if we are unable to raise the necessary capital or todo so on acceptable terms, our planned expansion and continued chances of  survival could be harmed.*

We will continue to spend substantial resources onexpanding our product pipeline, strengthening our commercialization efforts forour existing products, scaling-up of European operations, selling anddistributing our existing and future products, and conducting research and development,including clinical trials for other products and product candidates. Weanticipate that our capital resources will be adequate to fund operations andcapital expenditures through 2007. However, if we experience unanticipated cashrequirements during this period, we could require additional funds much sooner.We may raise money by the sale of our equity securities or debt, or theexercise of outstanding warrants and stock options by the holders of suchwarrants and options. However, given uncertain market conditions and thevolatility of our stock price, we may not be able to sell our securities inpublic offerings or private placements at prices and/or on terms that arefavorable to us, if at all. Also, the dilutive effect of additional financingscould adversely affect our per share results. We may also choose to obtainfunding through licensing and other contractual agreements. For example, welicensed the worldwide rights to the development, commercialization anddistribution of Dacogen to MGI. Such arrangements may require us to relinquishour rights to our technologies, products or marketing territories, or to grantlicenses on terms that are not favorable to us. If we fail to obtain adequatefunding in a timely manner, or at all, we will be forced to scale back ourproduct development activities, or be forced to cease our operations.

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

In addition to raising money by selling our equitysecurities to MGI in connection with the license agreement, we also expect torecord development and license revenue from payments made to us by MGI upon theachievement of regulatory and commercialization milestones. However, we mayfail to achieve these milestones, either because we are unable to secureregulatory approval of Dacogen in Europe or Asia or due to MGI’s inability toexpend the resources to commence sales of Dacogen as prescribed by the licenseagreement. In addition, the license agreement provides that MGI will pay us(i) a certain portion of revenues payable to MGI as a result of MGIsublicensing the rights to market, sell and/or distribute Dacogen, to theextent such revenues are in excess of the milestone payments, and (ii) a20% royalty increasing to a maximum of 30% on annual worldwide net sales ofDacogen. We cannot guarantee that we will continue to receive these payments,and we cannot be assured that MGI will expend the resources to 

37

----

expand sales of Dacogen inNorth America, or that the Janssen-Cilag companies will expend the resources tosell it in Europe and elsewhere, or that either company be successful in doingso.

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

We are exposed to equity price risk on our equityinvestment in AVI. Currently we own 2,384,211 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 cost basis in future periods, we may incur additionalimpairment charges relating to this investment, which in turn will affect ourresults of operations.

In addition, in connectionwith the restructuring of our February Notes and the issuance of theJune Notes, we issued three-year warrants to the June Note holdersexercisable into 2,634,211 of our AVI shares at an exercise price of $5.00 pershare, and we pledged the AVI shares to secure our obligation under theJune Notes. In January 2006, 300,000 of these warrants wereexercised. The remaining warrants expire on December 31, 2006.

***Product Development and Regulatory Risks***

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

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

We have a portfolio of cancer drugs in various stagesof development, including Partaject busulfan (Phase I/II), and we have beenconducting pre-clinical studies for VEGF and Cremophor-free paclitaxel. Inaddition, we expect to commence new clinical trials from time to time in thecourse of our business as our product development work continues. Conductingclinical trials is a lengthy, time consuming and expensive process and theresults are inherently uncertain. We have incurred and will continue to incursubstantial expense for, and we have devoted and expect to continue to devote asignificant amount of time to, pre-clinical testing and clinical trials.However, regulatory authorities may not permit us to undertake any additionalclinical trials for our product candidates. If we are unable to complete ourclinical trials, our business will be severely harmed and the price of ourstock will likely decline.

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

38

----

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

Completionof clinical trials may take several years or more. The length of a clinicaltrial varies substantially according to the type, complexity, novelty andintended use of the product candidate. For example, our three Phase IIIOrathecin clinical trials lasted from 1998 through the end of 2003. The lengthof time and complexity of these studies make statistical analysis difficult andregulatory approval unpredictable. The commencement and rate of completion ofour clinical trials may be delayed by many factors, including:

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

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

·       inabilityto obtain FDA approval of our clinical trial protocols;

·       slowerthan expected rate of patient recruitment;

·       inabilityto adequately follow patients after treatment;

·       difficultyin managing multiple clinical sites;

·       unforeseensafety issues;

·       lackof efficacy demonstrated during the clinical trials; or

·       governmentor regulatory delays.

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

*Wemay be required to suspend, repeat or terminate our clinical trials if they arenot conducted in compliance with regulatory requirements.*

Our clinical trials mustbe conducted in accordance with the FDA’s regulations and are subject tocontinuous oversight by the FDA and institutional review boards at the medicalinstitutions where the clinical trials are conducted. We outsource certainaspects of our research and development activities to contract research organizations(“CROs”). We have agreements with these CROs for certain of our clinicalprograms. We and our CROs are required to comply with good clinical practices(“GCPs”), regulations and guidelines enforced by the FDA for all of ourproducts in clinical development. The FDA enforces GCPs through periodicinspections of study sponsors, principal investigators, and study sites. If ourCROs or we fail to comply with applicable GCPs, the clinical data generated inour studies may be deemed unreliable and the FDA may require us to performadditional studies before approving our applications. In addition, our clinicaltrials must be conducted with product candidates produced under current goodmanufacturing practices (“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.

*Wemay be required to suspend, repeat or terminate our clinical trials if latertrial results fail to demonstrate safety and efficacy, or if the results arenegative, inconclusive or if they fail to demonstrate safety or efficacy.*

Our clinical trials may besuspended at any time if we or the FDA believe the patients participating inour studies are exposed to unacceptable health risks or if we or the FDA finddeficiencies in the conduct of these trials. Adverse medical events during aclinical trial could cause us to 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 not 

39

----

necessarily predict finalresults, and acceptable results in early trials may not be repeated in latertrials. A number of companies in the pharmaceutical industry have sufferedsignificant setbacks in advanced clinical trials, even after achievingpromising results in earlier trials.

Negative or inconclusive results during a clinicaltrial could cause us to terminate or repeat a clinical trial. The potentialfailures would delay development of our product candidates, hinder our abilityto conduct related pre-clinical testing and clinical trials and further delaythe commencement of the regulatory approval process. Further, the failures orperceived failures in our clinical trials would delay our product developmentand the regulatory approval process, damage our business prospects, make itdifficult for us to establish collaboration and partnership relationships andnegatively affect our reputation and competitive position in the pharmaceuticalindustry. Finally, if we are required to conduct other clinical trials for theproduct candidates, the additional trials would require substantial funding andtime, and we may be unable to obtain funding to conduct such clinical trials.

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

Sales of our products in foreign jurisdictions will besubject to separate regulatory requirements and marketing approvals. Approvalin the United States, or in any one foreign jurisdiction, does not ensureapproval in any other jurisdiction. The process of obtaining foreign approvalsmay result in significant delays, difficulties and expenses for us, and mayrequire additional clinical trials. We have applied through our subsidiaryEuroGen for regulatory approval to market mitomycin and paclitaxel in the UnitedKingdom and 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.

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. If we or our third-partymanufacturers fail to comply with any of the manufacturing regulations, we maybe subject to, among other things, product seizures, recalls, fines,injunctions, suspensions or revocations of marketing licenses, operatingrestrictions and criminal prosecution.

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

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

We currently outsource certain of our research anddevelopment programs involving the controlled use of biohazardous materials. Webelieve our collaborators have in place safety procedures for these materialsthat comply with governmental standards. Nevertheless, if an accident doesoccur, our research and product development will be negatively affected.

40

----

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

*The integration of Montigen’s business and technologyinto ours could disrupt our business and harm our financial condition, and theexpected benefits of the combination may never materialize.*

We acquired Montigen Pharmaceuticals, Inc. in April2006 for cash and shares of our common stock valued at approximately $40.0million, including $22.0 million contingent upon the achievement of specificregulatory milestones.  The Montigenacquisition involves risks, including problems combining the purchasedoperations and technologies, unanticipated costs and diversion of management’sattention from our core business.  Inaddition, we may have to restructure aspects of our business in order toachieve anticipated synergies.   Therecan be no assurance that we will be able to successfully integrate Montigen andits technology and personnel into our business. The failure to effectively manage the acquisition and integration ofMontigen could disrupt our business and harm our financial results.  

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

Because we have nomanufacturing facilities, we rely on third parties for manufacturing activitiesrelated to all of our products. As we develop new products and increase sales ofour existing products, we must establish and maintain relationships withmanufacturers to produce and package sufficient supplies of our finishedpharmaceutical products.  Reliance onthird party manufacturing presents the following risks: 

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

·       inabilityto fulfill our commercial needs if market demand for our products increasessuddenly, which would require us to seek new manufacturing arrangements and mayresult in substantial delays in meeting market demand; 

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

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

Any of these factors could delay clinical trials orcommercialization of our product candidates under development, interfere withcurrent sales and entail higher costs. 

*Our business may beharmed if the manufacture of our products is interrupted or discontinued.*

We may be unable to maintain our relationships withour third-party manufacturers. If we need to replace or seek newmanufacturing arrangements, we may have difficulty locating and entering intoarrangements with qualified contract manufacturers on acceptable terms, if atall. We are aware of only a limited number of companies on a worldwide basiswho operate manufacturing facilities in which our products can be manufacturedto our specifications and in compliance with GMPs. It could take severalmonths, or significantly longer, for a new contract manufacturing facility toobtain FDA approval and to develop substantially equivalent processes for theproduction of our products. We may not be able to contract with any of thesecompanies on acceptable terms, if at all. For example, the company that hadbeen purifying Nipent filed for reorganization under Chapter 11 and ceasedoperations in late 2004. We contracted with another manufacturer for thepurification of Nipent, but this manufacturer has not yet 

41

----

been qualified by the FDA .  If the new manufacturer fails to get FDA qualificationor goes out of business, we will be unable to satisfy the conditions necessaryto receive from Mayne Pharma the $5.0 million held back from us  pursuant to the terms of that transaction.

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

We rely on third-party suppliers to provide uswith numerous components used in our products under development. Relying onthird-party suppliers makes us vulnerable to component failures andinterruptions in supply, either of which could impair our ability to conductclinical trials or to ship our products to our customers on a timely basis.Using third-party suppliers makes it difficult and sometimes impossiblefor us to maintain quality control, manage inventory and production schedulesand control production costs. Vendor lead times to supply us with orderedcomponents vary significantly and can exceed six months or more. Both now andas we expand our need for manufacturing capacity, we cannot be sure that oursuppliers will furnish us with required components when we need them. Thesefactors could make it difficult for us to effectively and efficientlymanufacture our products, and could adversely impact our clinical trials,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.

Vendors may decide to limit or eliminate sales ofcertain products to the medical industry due to product liability or otherconcerns.  In the event one of our solesource suppliers decides not to manufacture the component, goes out ofbusiness, 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. 

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

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

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

·       ourability to negotiate acceptable collaborative arrangements; 

·       thecollaboration making us less attractive to potential acquirers;

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

42

----

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

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

In addition, our collaborators may undergo businesscombinations, which could have the effect of making the collaboration with usless attractive to them for a number of reasons. For example, if an existingcollaborator purchases a company that is one of our competitors, that companymay be less willing to continue its collaboration with us. A company that has astrategy of purchasing companies with attractive technologies might have lessincentive to enter into a collaboration agreement with us. Moreover, disputesmay arise with respect to the ownership of rights to any technology or productsdeveloped with any current or future collaborator. Lengthy negotiations withpotential collaborators or disagreements between us and our collaborators maylead to delays in or termination of the research, development orcommercialization of product candidates or result in time consuming andexpensive litigation or arbitration.   

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

From time to time we enter into collaborativerelationships with third parties to co-develop and market products. For example,we entered into an agreement with Peregrine Pharmaceuticals inFebruary 2001, pursuant to which we licensed a drug-targeting technologyknown as Vascular Targeting Agent, which is a proprietary platform designed tospecifically target a tumor's blood supply and subsequently destroy the tumorwith various attached therapeutic agents. The licensed technology isspecifically related to VEGF. Under the agreement, we made an up-front equityinvestment in Peregrine of $600,000 and will be obligated to make subsequentmilestone payments that could ultimately total $8.25 million. In addition,we will pay royalties to Peregrine based on the net revenues of any drugs wecommercialize using the VEGF technology. 

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

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

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

We actively pursue a policy of seeking patentprotection when applicable for our proprietary products and technologies,whether they are developed in-house or acquired from third parties. Weattempt to protect our intellectual property position by filing United Statesand foreign patent applications related to our proprietary technology,inventions and improvements that are important to the development of ourbusiness. To date, we have acquired licenses to or assignments of over 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 

43

----

products, three patentsfor Dacogen used in combination with an anti-neoplastic agent for thetreatment of cancer, and two patents for our Surface Safe product. These issuedUnited States patents will begin to expire in October 2012. We have beengranted patents and have received patent licenses relating to our proprietaryformulation technology, non-oncology and Partaject technologies, among whichat least five patents are issued or licensed to us. In addition, we areprosecuting a number of patent applications for drug candidates that we are notactively developing at this time. 

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 products are dependent upon compliancewith numerous licenses and agreements. These licenses and agreements require usto make royalty and other payments, reasonably exploit the underlyingtechnology of the applicable patents, and comply with regulatory filings. If wefail to comply with 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. 

44

----

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

The pharmaceutical industry in general and theoncology sector in particular is highly competitive and subject to significantand rapid technological change. Our competitors and probable competitorsinclude companies such as Aventis SG, Bristol-Myers Squibb Company, EliLilly & Co., GlaxoSmithKline, Novartis AG, Pfizer, Pharmion Corp.and others. 

Many of our competitors and research institutions areaddressing the same diseases and disease indications and working on products totreat such diseases as we are, and have substantially greater financial,research and development, manufacturing and marketing experience and resourcesthan we do. Some of our competitors have received regulatory approval forproducts, or are developing or testing product candidates that compete directlywith, our product candidates. For example, Dacogen faces competition fromPharmion’s Vidaza.

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 positions in our generic drugs areuncertain and subject to risks. The market for generic drugs, including thepricing for generic drugs, is extremely competitive. As a result, unless ourgeneric drugs are the first or among the initial few to launch, there is a highrisk that our products would not gain meaningful market share, or we would notbe able to maintain our price and continue the product line. Moreover,marketing of generic drugs is also subject to regulatory approval, and if wewere not able to obtain such approval before our competitors, we would lose ourcompetitive advantage. Failure to maintain our competitive position could havea material adverse effect on our business and results of operations. 

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

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

A number of ourcompetitors have substantially more capital, research and development,regulatory, manufacturing, marketing, human and other resources and experiencethan we have. As a result, our competitors may: 

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

·       produceand market their products more successfully than we do; 

·       establishsuperior proprietary positions; or 

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

45

----

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

*We are 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 abbreviated NDA’s for our generic mitomycinfor 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 patientprotection from tissue ulceration. This technology may increase the relativesolubility of hard-to-dissolve anti-cancer drugs, hence increasing itsstability or shelf 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 cannotpromote Mitozytrex as providing any injection site ulceration protection, norcan we promote any increased stability, solubility or shelf life extension, ascompared to generic mitomycin. We would be required to develop and submitadditional data to the FDA and receive FDA approval before we could make theseclaims. 

Although no funds were spent in 2005 or 2006, we havepreviously spent approximately $6.4 million on developing and marketingour generic and proprietary formulation products. We have completed our pre-commercialinvestment in developing Mitozytrex, and as of now we have not committed to aninternal budget for additional proprietary formulation development programs. Inaddition, we have no further generic drug development commitments, as we arefocusing on developing our proprietary drug candidates. 

We do not hold any intellectual property rights as tothe underlying compounds on which our generic or proprietary formulationproducts are based. We may in the future evaluate the generic drug market anddevelop additional generic or proprietary products based on these compounds,which may also be the subject of method, formulation and manufacturing processpatents held by third parties. Our development of generic or proprietaryproducts may also take place prior to, but in anticipation of, the expectedexpiration of existing patent protection for drugs developed by third parties.However, if existing patent protection on such products is otherwisemaintained, extended or expanded, it is unlikely that we will be able to marketour own generic or proprietary formulation products without obtaining a licensefrom the patent owner, which may not be available on commercially acceptableterms, if at all. 

46

----

*We may be subject to product liability lawsuits andour insurance may be inadequate to cover damages.*

Clinical trials and commercial use of our current andpotential products may expose us to liability claims from the use or sale ofthese products. Consumers, healthcare providers, pharmaceutical companies 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 reasonable costor in sufficient amounts to protect us against losses. If third parties bring asuccessful product liability claim or series of claims against us for uninsuredliabilities or in excess of insured liabilities, we may not have sufficientfinancial resources to complete development or commercialization of any of ourproduct candidates and our business and results of operations will be adverselyaffected. 

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

Further, our success is dependent on key personnel,including members of our senior management and scientific staff. If any of ourexecutive officers decides to leave and we cannot locate a qualifiedreplacement in time to allow a smooth transition, our business operation may beadversely affected. To successfully expand our operations, we will need toattract and retain additional highly skilled individuals, particularly in theareas of sales, marketing, clinical administration, preclinical and developmentresearch, manufacturing and finance. We compete with other companies for theservices of existing and potential employees, however to the extent theseemployees favor larger, more established employers, we may be at adisadvantage. 

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

Our operations are vulnerable to interruption by fire,power loss, floods, telecommunications failure and other events beyond ourcontrol. In addition, our operations are susceptible to disruption as a resultof natural disasters such as earthquakes. So far we have never experienced anysignificant disruption of our operations as a result of earthquakes or othernatural disasters. Although we have a contingency recovery plan, anysignificant business interruption could cause delays in our drug developmentand sales and harm our business. 

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

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

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

·       eliminationof cumulative voting; and 

·       eliminationof stockholder action by written consent. 

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

We are also subject to Section 203 of theDelaware General Corporation Law, an anti-takeover provision. In general,Section 203 of the Delaware General Corporation Law prevents a stockholderowning 15% or more of a corporation's outstanding voting stock from engaging inbusiness combinations 

47

----

with a Delawarecorporation for three years following the date the stockholder acquired 15% ormore of a corporation's outstanding voting stock. This restriction is subjectto exceptions, including the approval of the board of directors and of theholders of at least two-thirds of the outstanding shares of voting stock notowned by the interested stockholder. 

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

48

----

**Item6.  Exhibits**

| Exhibit | ** ** | ** **                                                                                                                                                                            |
|---------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.** | ** ** | **Description of Document**                                                                                                                                                           |
| 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 |

 

49

----

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|          |             | SUPERGEN, INC. |                                                                   |
|----------|------------------|----------------|------------------------------------------------------------------------|
| Date:    | November 9, 2006 |           | By:                                                                    | /s/ JAMES S.J. MANUSO |   |
|     |             |           | James S.J. Manuso, Ph.D.                                               |   |
|     | * *         | * *       | *President and Chief Executive Officer  (Principal Executive Officer)* |
|     |             | By:            | /s/ MICHAEL MOLKENTIN                                                  |   |
|     |             |           | Michael Molkentin                                                      |   |
| * * | * *         | * *       | *Chief Financial Officer*                                              | * * |
| * * |             |           | *(Principal Financial and Accounting*                                  |
| * * |             |           | *Officer)*                                                             |   |
|          |                  |                |                                                                        |  |  |

 

50

----