Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes |X|  No  |  |

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes |  |  No  |  |

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Check one:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - - 2 of the Exchange Act).

See notes to unaudited condensed consolidated financial statements.

See notes to unaudited condensed consolidated financial statements.

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of September 30, 2009,March 31, 2010, and the results of operations for the three-month and nine-month periods ended September 30, 2009 and 2008 and cash flows for the nine-monththree-month periods ended September 30, 2009March 31, 2010 and 2008.2009.  The results of operations for the three-month and nine-month periodsperiod ended September 30, 2009March 31, 2010 are not necessarily indicative of the results to be expected for any other period or the full year.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.  Subsequent events have been evaluated through November 6, 2009, the date prior to the issuance of these financial statements.  These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.2009, which includes consolidated financial statements and notes thereto for the years ended December 31, 2009, 2008 and 2007.

Since its inception, the Company has incurred significant operating losses related to its research and development programs and supporting activities.  The Company has funded its losses through the sale of equity securities, debt and cash received pursuant to collaboration agreements, including its collaboration agreement with Merck & Co., Inc. (“Merck”(together with its subsidiaries, “Merck”) for the development, manufacture and commercialization of its lead product candidate, ridaforolimus previously known as deforolimus (see Note 2).  At September 30, 2009,March 31, 2010, the Company had $57.5$25.4 million of cash and cash equivalents.

The Company expects to continue to incur significant operating expenses through at least 2011 and, net losses relatedtherefore, will require substantial additional funding to support its research and development programs, including preclinical development and supporting activities through at least 2010.clinical trials, for operating expenses, for the pursuit of regulatory approvals, and for establishing manufacturing, marketing and sales capabilities.  There are numerous factors that affect the Company’s level of spending on its research and development programs and supporting activities, including the extentnumber, size and complexity of, clinical trials and other development activities for ridaforolimus in collaboration with Merck, the timing and amount of milestone payments to be received from Merck, the rate of enrollment of patients in, clinical trials for ridaforolimus andAP24534, the extent of other development activities for AP24534, the progress of itsthe Company’s preclinical and discovery research and preclinical programs, including AP26113, the timing and amount of any f uture milestone and royalty payments related to ridaforolimus from Merck, and the impact of business development activities, among other factors.

In July 2007, the Company entered into a collaboration agreement with Merck for the joint global development, manufacture and commercialization of ridaforolimus, the Company’s lead product candidate, for use in cancer (the “Collaboration Agreement”).  The information in this Note 2 describes the Collaboration Agreement as in effect at March 31, 2010.  As described in Note 12, this agreement was amended and restated in May 2010.

Under the terms of the Collaboration Agreement, as in effect through March 31, 2010, Merck and the Company will conducthave been conducting a broad-based development program in multiple types of cancer, pursuant to a global development plan agreed upon by the parties.cancer.  Each party will fundfunded 50 percent of the global development costs, except that Merck will fundfunded 100 percent of any cost of development that is specific to development or commercialization of ridaforolimus outside the United States.  TheUnder the Collaboration Agreement, provides that, in certain circumstances, either party may opt out of conducting and funding certain late-stage clinical trials after demonstration of clinical proof of concept, which would result in changes in development and commercialization responsibilities and compensation arrangements.  Thethe Company iswas responsible for supplying the active pharmaceutical ingredient used in the product and Merck iswas responsible for the formulation of the finished product, all under a separate supply agreement between the parties entered into in May 2008.

The Collaboration Agreement providesprovided that, in the United States, the Company and Merck willwould co-promote the product, the Company willwould distribute and sell the product for all cancer indications and record all sales, and each party willwould receive 50 percent of the profit from such sales.  Outside the United States, Merck willwould distribute, sell and promote the product and book all sales, and Merck willwould pay the Company tiered double-digit royalties on such sales.  Royalties arewould be payable by Merck, on a country by country basis, until the later of (i) the expiration of the last valid claim of any patent rights owned by either the Company or Merck that cover the product, (ii) a specified number of years from first commercial sale, or (iii) the last date upon which the Company supplies the active pharmaceutical ingredient to Merck under the supply agreement, subject to partial reduction in certain circumstances.

Under the terms of the Collaboration Agreement, Merck paid the Company an initial up-front payment of $75 million in July 2007, and has agreed to pay up to $452$652 million in milestone payments, of which $53.5 million had been paid through March 31, 2010, based on the successful development of ridaforolimus in multiple potential cancer indications, and up to $200 million in milestone payments based on achievement of specified product sales thresholds.  The Company assessed each of the deliverables related to the Collaboration Agreement against the separation criteria for multiple element arrangements and concluded that the deliverables constituted one unit of accounting.  The up-front and milestone payments received through March 31, 2010 have been deferred and are being recognized as revenue on a straight-line basis through 2023, the estimated expiration of the patents rela ted to the underlying technology.

Under the Collaboration Agreement, Merck hashad also agreed to provide the Company with up to $200 million in interest-bearing, repayable, development cost advances to cover a portion of the Company’s share of global development costs, after the Company hashad paid $150 million in global development costs and hashad obtained regulatory approval to market ridaforolimus from the U.S. Food and Drug Administration (“FDA”) in the United States or similar regulatory authorities in Europe or Japan.  All amounts to be paid to the Company by Merck, with the exception of any development cost advances, are non-refundable.

Development costs under the Collaboration Agreement arewere aggregated and split between the Company and Merck in accordance with the terms of the agreement.  The Company’s share of such development costs for the three-month periods ended March 31, 2010 and 2009 are reflected in operating expenses in the Company’s statement of operations.  Any amounts due to or from Merck in respect of such development costs and milestone payments earned but not received are recorded as such on the Company’s balance sheet.  At September 30, 2009,March 31, 2010, the Company hadhas recorded an amount due from Merck under the Collaboration Agreement of $5.2$4.6 million.

The Company leases certain assets under capital leases having terms up to three years.  Assets under capital leases included in property and Merck are currently engaged in the annual process of updating the global development plan for ridaforolimusequipment were as follows at March 31, 2010 and are discussing possible revisions to the terms of the collaboration agreement designed to address funding for the continued development and commercial launch of ridaforolimus (see Note 1).  The outcome of these deliberations will determine the costs of and funding for development and commercialization of ridaforolimus going forward.December 31, 2009:

Intangible and other assets, net, were comprised of the following at September 30, 2009March 31, 2010 and December 31, 2008:2009:

Amortization expense for intangible assets amounted to $770,000$570,000 and $461,000 in$203,000 for the three-month periods ended March 31, 2010 and 2009, and 2008, respectively.  The weighted average amortization period for intangible assets was 15.315.2 years in 20092010 and 14.8 years in 2008, respectively.2009.

Long-term debt wasand capital lease obligations were comprised of the following at September 30, 2009March 31, 2010 and December 31, 2008:

The annual aggregate future principal payments due under these financing obligations, absent any future debt covenant violations that would require early repayment of the above loan, are $350,000were as follows at March 31, 2010:

Under the Company’s deferred executive compensation plan, the Company accrues a liability for the remaindervalue of the awards ratably over the vesting period.  The value of awards made in March 2010 and 2009 $1.9 million inwere $1,709,000 and $1,121,000, respectively.  The net expense for this plan was $401,000 and $204,000 for the three-month periods ended March 31, 2010 $3.7 million in 2011, $4.7 million in 2012, and $1.2 million in 2013.2009, respectively.

At December 31, 2009, the Company had 145,000,000 shares of Common Stock and Warrantscommon stock authorized.  On January 20, 2010, following approval at a special meeting of stockholders of the Company, the Company filed a certificate of amendment to its certificate of incorporation to increase the number of authorized shares of common stock of the Company to 240,000,000 shares.

On February 25, 2009, the Company sold 14,378,698 shares of its common stock in a registered direct offering to institutional investors, at a purchase price of $1.69 per share, resulting in net proceeds after fees and expenses of $22.8 million.  The investors also received warrants to purchase an additional 10,784,024 shares of the Company’s common stock exercisable at a price of $2.15 per share in cash or, under certain circumstances, pursuant to the net exercise provisions of the warrants.  At the election of the warrant holder, upon certain transactions, including a merger, tender offer or sale of all or substantially all of the assets of the Company, the holder may receive cash in exchange for the warrant, in an amount determined by application of the Black-Scholes option valuation model at the time of any suchsu ch event, if the consideration received by the stockholders from such transaction is less than $2.15 per share.  The warrants became exercisable on August 25, 2009 and will expire on February 25, 2012 if not exercised by that date.  No warrants have yet been exercised.exercised through March 31, 2010.

The warrants are classified asAs a derivative liability asresult of the potential cash settlement provision, the warrants do not qualify to be classified as an equity instrument but instead are classified as a result of the potential cash settlement of the warrants.derivative liability.  Accordingly, the fair value of the warrants was recordedis reflected on the condensed consolidated balance sheet as a liability upon issuance and such fair value is adjusted at each financial reporting date with the adjustment reflected in the consolidated statement of operations.  The Company has classified the warrant obligation as a long-term liability as there is no indication that a merger, tender offer or similar transaction is probable.

On August 7, 2009,January 11, 2010, the Company sold 21,850,000 shares of its common stock in an underwritten public offering, including 2,850,000 sharesfiled a shelf registration statement with the SEC for the issuance of common stock, upon exercise bypreferred stock, various series of debt securities and/or warrants or rights to purchase any of such securities, either individually or in units, with a total value of up to $125 million, from time to time at prices and on terms to be determined at the underwriterstime of their over-allotment option, at a purchase priceany such offering.  This filing was declared effective on January 21, 2010.  As of $1.75 per share.  Net proceeds of this offering, after underwriting discounts and commissions and direct expenses, were $35.6 million.  Harvey J. Berger, M.D.,March 31, 2010, the Company’s chairman and chief executive officer, purchased 1,714,286 shares of common stock for $3 million in this offering.  Following this offering, the Company has approximately $1.8full $125 million of securities remainingremain available for issuance under itsthe shelf registration statement which can be sold prior to February 6, 2010, subject to extension under SEC rules.statement.

The Company provides disclosure of financial assets and financial liabilities that are carried at fair value based on the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements may be classified based on the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities using the following three levels:

The following table presents information about the Company’s assets and liabilities as of March 31, 2010 and December 31, 2009 that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

The Company’s cash equivalents are considered highly liquid, but are not included in an exchange traded fund and are therefore classified as Level 2 in the fair value hierarchy.  The Company’s warrant liability is carried at fair value and is classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs.

The carrying amounts of cash, cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature.  The carrying amount of the warrantsCompany’s bank term note of $11.2 million at March 31, 2010 approximates fair value due to its variable interest rate and other terms.  The Company’s obligation under its executive compensation plan is based in part on the date of their issuance was determined to be $3.6 million using the Black-Scholes option valuation model applying the following assumptions: (i) a risk-free rate of 1.5%, (ii) an expected term of 3 years, (iii) no dividend yield, and (iv) a volatility of 66%.  As of September 30, 2009, thecurrent fair market value of the warrants was determined to be $11.2 million using the Black-Scholes option valuation model applying the following assumptions: (i) a risk-free rate of 1.15%, (ii) an expected term of 2.4 years, (iii) no dividend yield and (iv) a volatility of 78%.  The increase in theunderlying securities, which is therefore stated at its estimated fair value of the warrants was recognized in other income (expense).  The change in the fair value of the warrant liability since its initial measurement was as follows (in thousands):

The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively “share-based payments”), pursuant to stockholder approved plans.  The Company’s statement of operations included total compensation cost from share-based payments for the three and nine-monththree-month periods ended September 30,March 31, 2010 and 2009, and 2008 as follows:

Net loss per share amounts have been computed based on the weighted-average number of common shares outstanding during each period.  Because of the net loss reported in each period, diluted and basic net loss per share amounts are the same.  For the three and nine-monththree-month periods ended September 30,March 31, 2010 and 2009, and 2008, the following potentially dilutive securities were not included in the computation of net loss per share because the effect would be anti-dilutive:

Lilly appealed several of the District Court’s rulings to the U.S. Court of Appeals for the Federal Circuit (the “CAFC”) and, on April 3, 2009, the CAFC ruled in Lilly’s favor, finding that the four claims of the ‘516 Patent asserted in this lawsuit are not supported by adequate written description and are therefore invalid.  The CAFC did not rule on other validity issues raised by Lilly or on the findings of infringement.  In addition, the CAFC affirmed the District Court’s ruling that the patent’s enforceability is not impaired by inequitable conduct during its prosecution.  The CAFC granted Plaintiffs subsequent petition requesting en banc rehearing of this matter before the full CAFC.  The scheduled period for submitting briefs concludes in late November, and a hearing has been scheduled forCAFC heard oral arguments on December 7, 2009.  On Marc h 22, 2010, the CAFC ruled in Lilly’s favor, holding that the four patent claims are invalid due to inadequate written description.

A reexamination at the United States Patent and Trademark Office (“PTO”) of aspects of patentability of the ‘516 Patent had been initiated by Lilly in April 2005.  On October 16, 2008, the PTO issued a final office action confirming that 53 claims of the ‘516 patent are patentable, while rejecting 45 of the remaining  claims, including claims relating to the Lilly litigation and claims relating to the Amgen litigation.  The Company has appealed that decision to the Patent Office Board of Appeals and Interferences and filed its appeal brief on May 18, 2009.

In April 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires disclosures about fair value of financial instruments in interim reporting periods as well as in annual financial statements.  The effective date is June 15, 2009 and accordingly,May 2010, the Company is now requiredand Merck entered into the Amended and Restated Collaboration and License Agreement (“License Agreement”) that replaces the Collaboration Agreement.  Under the terms of the License Agreement, the Company has granted Merck an exclusive license to provide additional disclosures, which are includeddevelop, manufacture and commercialize ridaforolimus in Note 7.

Under the adoption did not materially impact its financial condition, resultsLicense Agreement, Merck will pay the Company an initial up-front fee of operations, or cash flow.  The$50 million and has agreed to pay the Company providedup to $514 million in regulatory and sales milestone payments, based on the additional disclosuressuccessful development of ridaforolimus in Note 1.multiple potential cancer indications and upon achievement of specified product sales thresholds.  These potential milestone payments include up to $65 million associated with potential regulatory filings and approvals for the sarcoma indication, which is currently in Phase 3 clinical development (consisting of $25 million for acceptance of a new drug application by the FDA, $25 million for marketing approval in the United States, $10 million for marketing approval in Europe, and $5 million for marketing approval in Japan), up to $249 million associated with potential regulatory filing s and approvals for other cancer indications, and up to $200 million associated with the achievement of certain sales thresholds.

In September 2009, FASB issued authoritative guidanceThe License Agreement provides that modifiesall ridaforolimus activities that are currently the responsibility of the Company will be transitioned to Merck, a process the Company estimates will take approximately six months to complete.  Merck will reimburse the Company for all costs it incurs related to the transition.

The Company considers this License Agreement to be a new agreement for accounting purposes as the agreement has been materially modified.  Accordingly, the impact of the new agreement terms will be reflected in the Company’s financial statements in the second quarter of 2010 when the transaction occurred.  The Company is currently evaluating the accounting treatment to be applied to the License Agreement, including the impact on revenue recognition and presentation of costs incurred under the terms of the agreement.

In addition, the Company has not yet adopted new accounting guidance for multiple element arrangements.revenue arrangements that is effective for the Company on January 1, 2011 and may consider early adoption of this guidance, which may impact the accounting treatment.  This new accounting guidance requires an entity to allocate revenue to each unit of accounting in multiple deliverable arrangements based on the relative selling price of each deliverable.  It also changes the level of evidence of stand-alone selling prices required to separate deliverables by allowingrequiring an entity to make its best estimate of the stand-alone selling price of the deliverables when more objective evidence of selling price is not available.  ImplementationPreviously the Company was required to have objective evidence of fair value of the undelivered items in order to have separate units of accounting for multiple element arrangements.  

New accounting guidance was approved in April 2010 that establishes the criteria for determining whether the milestone method of revenue recognition is appropriate.  Under this guidancemethod, a vendor can recognize consideration that is required no later than fiscal years beginning after June 15, 2010 and this guidance maycontingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be applied prospectively to new or materially modified arrangements after the effective date or retrospectively.  Early application is permitted.considered substantive.  The Company has not yet evaluated the impact, thatif any, of this new guidance may have on its financial statements.

Our vision is to transform the lives of cancer patients with breakthrough medicines.  Our mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need – aggressive cancers where current therapies are inadequate.  Our goal is to build a fully integrated oncology company focused on novel, molecularly targeted therapies to treat solid tumors and hematologic cancers, as well as the spread of primary tumors to distant sites.

Our lead cancer product candidate, ridaforolimus, previously known as deforolimus, is being studied in multiple clinical trials in patients with various types of cancers.  In July 2007, we entered into a global collaboration agreement, or the Collaboration Agreement, with Merck & Co., Inc., or Merck, to jointly develop, manufacture and commercialize ridaforolimus for use in cancer.cancer, which agreement was amended and restated in May 2010 as discussed further below.  We initiated patient enrollment in our initial Phase 3 clinical trial of ridaforolimus in patients with metastatic sarcoma in the third quarter of 2007.  We expect to completecompleted patient enrollment in this Phase 3 clinical trial by approximately year-endin the fourth quarter of 2009.  We also expect to obtain the results of the second interim analysis of progression-free surviva l or PFS, the primary endpoint of thisthe trial progression-free survival or PFS, by approximatelyin the end of the firstsecond quarter of 2010 and the final analysis of PFS by approximatelyin the end of the third quartersecond half of 2010.  In addition, in 2008 and 2009 we and Merck initiated patient enrollment in Phase 2 clinical trials in patients with metastatic breast cancer, metastatic endometrial cancer, metastatic non-small-cell lung cancer and advanced prostate cancer, and Phase 1 clinical trials of ridaforolimus in combination with other agents, all as part of our joint global development plan with Merck.  These various trials are ongoing at this time.

Our collaboration with Merck for the global development and commercialization of ridaforolimus anticipates that we together with Merck will conduct a broad-based development program in multiple potential indications.  The collaboration agreement provides that each party will fund 50 percent of global development costs, except for certain specific costs to be funded 100 percent by Merck.  The collaboration agreement establishes responsibilities for supply of the product for development and commercial purposes, promotion, distribution and sales of the product, governance of the collaboration, termination provisions and other matters.

In the second quarter of 2009, we designated our third product candidate, AP26113, an investigational anaplastic lymphoma kinase, or ALK, inhibitor, as a development candidate.  We have commenced preclinical testing and investigational new drug, or IND, enabling studies of this product candidate.

In addition to our lead development programs, we have a focused drug discovery program centered on small-molecule, molecularly targeted therapies and cell-signaling pathways implicated in cancer.  We

In addition to cost-sharing provisions, the Collaboration Agreement as in effect at March 31, 2010 provided for an up-front payment by Merck of $75 million, which was paid to us in July 2007, and provided up to $452 million in milestone payments based on the successful development of ridaforolimus in multiple potential cancer indications, of which $53.5 million has been paid to us through March 31, 2010, and up to $200 million in milestone payments based on achievement of specified product sales thresholds.  Merck had also have an exclusive licenseagreed to provide us with up to $200 million in interest-bearing, repayable, development cost advances to cover a familyportion of patents, threeour share of global development costs, after we had paid $150 million in global development costs and had obtained regulatory approval to market ridaforolimus from the FDA in the United States or similar regulatory authorities in Europe or Japan.  The Collaboration Agreement provided that each party would receive 50 percent of the profit from the sales of ridaforolimus in the United States, and one in Europe, including a pioneering U.S. patent covering methodsMerck would pay us tiered double-digit royalties on sales of treating human disease by regulating NF-κB cell-signaling activity.  Additionally,ridaforolimus outside the United States.

In May 2010, we entered into an Amended and Restated Collaboration and License Agreement, or the License Agreement, with Merck that replaces the Collaboration Agreement.  Under the terms of the License Agreement, we have developed a proprietary portfolio of cell-signaling regulation technologies, our ARGENT technology,granted Merck an exclusive license to control intracellular processes with small molecules, which may be usefuldevelop, manufacture and commercialize ridaforolimus in oncology, and Merck assumes responsibility for all activities related to the development, of therapeutic vaccines and gene and cell therapy products and which provide versatile tools for applications in cell biology, functional genomics and drug discovery research.

Under the License Agreement, Merck will pay us an initial up-front fee of $50 million and has agreed to pay us up to $514 million in regulatory and sales milestone payments, since July 2007based on the successful development of ridaforolimus in the aggregatemultiple potential cancer indications or upon achievement of $128.5specified product sales thresholds.  These potential milestone payments include up to $65 million and we expect that our license and collaboration revenue will increase in future periods.  However, we expect to incur substantial and increasing operating losses for the foreseeable future, primarily due to costsmilestones associated with the potential sarcoma indication, which currently is in Phase 3 clinical development, up to $249 million associated with potential regulatory filings and approvals for other cancer indications and up to $200 million in milestones based on achievement of certain sales thresholds.

The License Agreement provides that all ridaforolimus activities that are currently our pharmaceutical productresponsibility will be transitioned to Merck, a process we estimate will take approximately six months to complete.  Merck will reimburse us for all costs we incur related to the transition.

As a result of our entry into the License Agreement, we will not be eligible to receive the $74.5 million in milestones that we were eligible to receive under the original Collaboration Agreement upon the start of four Phase 3 clinical trials in indications other than sarcoma, or up to $200 million in development programs, includingcost advances after we had paid $150 million in global development costs and obtained regulatory approval of ridaforolimus, since Merck will be responsible for fully funding all clinical trials and product manufacturing, pre-commercial activities, personnel andother development activities.

As a result of this agreement, in addition to the $50 million up-front payment from Merck, we will also receive a payment of approximately $14 million for our intellectual property.  We expect suchridaforolimus costs and operating lossesincurred in the quarter ended March 31, 2010.  Of this amount, $4.6 million is reflected as due from Merck in the accompanying balance sheet as of March 31, 2010 in accordance with the cost sharing provisions of the Collaboration Agreement as in effect at that time.  The impact of the revised agreement will be offsetreflected in part by development cost-sharing provisions and license revenue from our collaboration with Merck forfinancial statements in the development and commercializationsecond quarter of ridaforolimus.2010.

As of September 30, 2009,March 31, 2010, we had cash and cash equivalents of $57.5 million, working capital of $37.1$25.4 million, deferred revenue of $113.6$109.5 million related to non-refundable up-front and milestone payments from Merck, and total stockholders’ deficit of $72.3$110.8 million.

Our operating losses are primarily due to the costs associated with our pharmaceutical product development programs, personnel and intellectual property protection and enforcement.  As our product development programs progress, we incur significant costs for toxicology and pharmacology studies, product development, manufacturing, clinical trials and regulatory support.  We also incur costs related to planning for potential regulatory approval and commercial launch of products, including market research and assessment.  These costs can vary significantly from quarter to quarter depending on the number of product candidates in development, the stage of development of each product candidate, the number of patients enrolled in and complexity of clinical trials and other factors.  Costs associated with our intellectual property include legal fees and other costs to prosecute, maintain, protect and enforce our intellectual property, which can fluctuate from quarter to quarter depending on the status of patent issues being pursued, including our on-going patent litigation.

Historically, we have relied primarily on the capital markets as our source of funding.  We may also obtain funding from collaborations with pharmaceutical, biotechnology and/or medical device companies for development and commercialization of our product candidates, such as our collaboration with Merck for the global development, manufacture and commercialization of ridaforolimus.  These collaborations can take the form of licensing arrangements, co-development or joint venture arrangements or other structures.  In addition, we utilize long-term debt and leases to supplement our funding, particularly as a means of funding investment in property and equipment and infrastructure needs.  If funding from these various sources is unavailable on reasonable terms, we may be required to reduce our operationsoperatio ns in order to conserve cash and capital by delaying, scaling back or eliminating one or more of our product development programs or enter into licenses or other arrangements with third parties on terms that may be unfavorable to us.  Please see additional information under the caption “Liquidity and Capital Resources” below.

Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of revenue recognition, the carrying value of intangible assets, stock-based compensation and the fair value of warrants to purchase our common stock.

For the nine-month periodthree months ended September 30, 2009,March 31, 2010, we reported license and collaboration revenue of $6.1$2.2 million.  License and collaboration revenue is recorded based on up-front payments, periodic license payments and milestone payments received or deemed probable of receipt, spread over the estimated performance period of the license or collaboration agreement.  Regarding our collaboration with Merck for the development, manufacture and commercialization of ridaforolimus, as of September 30, 2009,March 31, 2010, we have received an up-front payment of $75 million and milestone payments of $53.5 million related to the start of Phase 2 and Phase 3 clinical trials of ridaforolimus.  We are recognizing revenues related to such payments on a straight-line basis through 2023, the estimated patent life of the underlying technology. 
60;Changes in development plans could impact the probability of receipt of future milestone payments on which revenue recognition is based.  In addition, changes in estimated performance periods, including changes in patent lives of underlying technology or changes in the terms of our agreements that alter our deliverables, could impact the rate of revenue recognition in any period.  Such changes in revenue could have a material impact on our statement of operations.

In determining expense related to stock-based compensation, we utilize the Black-Scholes option valuation model to estimate the fair value of stock options granted to employees, consultants and directors.  Application of the Black-Scholes option valuation model requires the use of factors such as the market value and volatility of our common stock, a risk-free discount rate and an estimate of the life of the option contract.  Fluctuations in these factors can result in adjustments to our statements of operations.  If, for example, the volatility of our common stock, or the expected life of stock options granted during the nine-monththree-month period ended September 30, 2009March 31, 2010 were 10% higher or lower than used in the valuation of such stock options, our valuation of, and total stock-based compensation expense to be recognizedrecogniz ed for, such awards would have increased or decreased by up to $77,000,$25,000, or $45,000$15,000, respectively.

Warrants to purchase 10,784,024 shares of our common stock, issued on February 25, 2009 in connection with a registered direct offering of 14,378,698 shares of our common stock, are classified as a derivative liability.  Accordingly, the fair value of the warrants is recorded on our consolidated balance sheet as a liability, and such fair value is adjusted at each financial reporting date with the adjustment to fair value reflected in our consolidated statement of operations.  The fair value of the warrants is determined using the Black-Scholes option valuation model.  Fluctuations in the assumptions and factors used in the Black-Scholes model would result in adjustments to the fair value of the warrants reflected on our balance sheet and, therefore, our statement of operations.  If, for example, theth e volatility of our common stock at September 30, 2009March 31, 2010 were 10% higher or lower than used in the valuation of such warrants, our valuation of the warrants would have increased or decreased by up to $950,000$693,000 with such difference reflected in our statement of operations.

We recognized license and collaboration revenue of $2.2 million in the three-month period ended September 30, 2009,March 31, 2010, compared to $1.5$1.9 million in the corresponding period in 2008.2009.  The increase in license and collaboration revenue was due primarily to the increase in revenue recognized from the Merck collaboration of $618,000,$255,000, based on the non-refundable up-front and milestone payments totaling $128.5 million received from Merck to date, in accordance with our revenue recognition policy.  We expect that our license and collaboration revenue will remain relatively unchanged forincrease over the fourth quarterremaining quarters of 2009.2010 due to the impact of the License Agreement we entered into with Merck in May 2010, although we have not yet determined the accounting consequences of the License Agreement.

Research and development expenses increaseddecreased by $1.0$2.9 million, or 8%16%, to $14.4$14.8 million in the three-month period ended September 30, 2009,March 31, 2010, compared to $13.4$17.7 million in the corresponding period in 2008,2009, as described in further detail below.

The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries.  This process typically takes years to complete and requires the expenditure of substantial resources.  Current requirements include:

Upon approval by the appropriate regulatory authorities, including in some countries approval of product pricing, we may commence commercial marketing and distribution of the product.

We group our research and development, or R&D, expenses into two major categories: direct external expenses and all other R&D expenses.  Direct external expenses consist of costs of outside parties to conduct laboratory studies, to develop manufacturing processes and manufacture product candidates, to conduct and manage clinical trials and similar costs related to our clinical and preclinical studies.  These costs are accumulated and tracked by product candidate.  All other R&D expenses consist of costs to compensate personnel, to purchase lab supplies and services, to lease, operate and maintain our facility, equipment and overhead and similar costs of our research and development efforts.  These costs apply to work on our clinical and preclinical candidates as well as our discovery researchres earch efforts.  These costs have not been tracked by product candidate because the number of product candidates and projects in R&D may vary from time to time and because we utilize internal resources across multiple projects at the same time.

Direct external expenses are further categorized as costs for clinical programs and costs for preclinical programs.  Preclinical programs include product candidates undergoing toxicology, pharmacology, metabolism and efficacy studies and manufacturing process development required before testing in humans can begin.  Product candidates are designated as clinical programs once we have filed an IND with the FDA, or a similar filing with regulatory agencies outside the United States, for the purpose of commencing clinical trials in humans.

Our R&D expenses for the three-month period ended September 30, 2009,March 31, 2010, as compared to the corresponding period in 2008,2009, were as follows:

OurIn 2010, our clinical programs consistconsisted of ridaforolimus, our lead product candidate ridaforolimus, for which we initiated clinical development in 2003, and AP24534, our kinase inhibitor program.for which we initiated clinical development in 2008.  The direct external expenses for ridaforolimus reflect our share of such expenses, including our share of Merck’s costs, pursuant to the cost-sharing arrangementsarrangement of our collaboration with Merck.  Merck as in effect through March 31, 2010.  As described above, this cost sharing provision is being modified by the License Agreement entered into in May 2010.  The License Agreement provides that Merck will fund 100 percent of all ridaforolimus costs, including all costs incurred by us, effective as of January 1, 2010.

Direct external expenses for ridaforolimus were $6.9$6.2 million in the three-month period ended September 30, 2009, an increaseMarch 31, 2010, a decrease of $1.6$2.7 million, as compared to the corresponding period in 2008,2009, primarily reflecting our share of increasesdecreases in clinical trial costs ($1.41.1 million) and manufacturing costs ($281,000)1.1 million) and supporting non-clinical costs ($511,000), offset in part by decreasesan increase in supporting non-clinical costsour share of the programMerck’s services ($332,000)245,000).  Clinical trial costs increaseddecreased due primarily to increasingcompletion of enrollment in our Phase 3 clinical trial of ridaforolimus in patients with metastatic sarcomas and ina Phase 21 clinical trialstrial of ridaforolimus in patientscombination with breast cancer, endometrial cancer, prostate cancer and non-small cell lung cancer.  Contract manufacturingbevacizumab.  Manufacturing costs increased primarily to provide supply of ridaforolimus to ongoing clinical trials.  Costs of non-clinical studies decreased due primarily to the completion in 2009 of initiatives related to development, qualification and validation of the process for manufacturing ridaforolimus.  Non-clinical costs decreased due primarily to the completion in 2009 of certain toxicology studiesand stability studies.  Merck’s services provided to the collaboration increased as a result of ridaforolimus required toMerck’s increasing activities in support regulatory filingsof clinical trials and other activities for which Merck is responsible.  As a result of the License Agreement with the FDA and certain other non-recurring support costs in 2008.  WeMerck, we expect that our direct external costsexpenses for ridaforolimus netover the remaining quarters of Merck’s share2010 will decrease as we transition all responsibilities for development to Merck, and all expenses incurred by us related to the development of such costs,ridaforolimus and transition of responsibilities to Merck will remain relatively unchanged in the fourth quarter of 2009.

We designatedThe direct external expenses incurred in our preclinical program relate to miscellaneous costs for our third developmentproduct candidate, AP26113, an anaplastic lymphoma kinase, or ALK, inhibitor and progressed it into preclinical testing and IND enabling studies during the second quarter of 2009.  All such testing and studies were conducted internally during the three-month period ended September 30, 2009.AP26113.  We incurred no direct external expenses for preclinical programs duringin the three-month periodsperiod ended September 30, 2009 and 2008 and expect no such expenses for the fourth quarter ofMarch 31, 2009.  Prior to the nominationdesignation of AP26113 as our third developmentproduct candidate, in the second quarter of 2009, all programs other than clinical programs were designated as discovery research and are included in “all other R&D expenses” in the table above.above table.  We expect that our direct external expenses for our preclinical program, AP26113, will increase over the remaining quarters of 2010 as we conduct additional pharmacology, toxicology and other studies designed to support the potential filing of an IND for this product candidate.

The successful development of our product candidates is uncertain and subject to a number of risks.  We cannot be certain that any of our product candidates will prove to be safe and effective or will meet all of the applicable regulatory requirements needed to receive and maintain marketing approval.  Data from preclinical studies and clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory clearance.  We, the FDA or other regulatory authorities may suspend clinical trials at any time if we or they believe that the subjects participating in such trials are being exposed to unacceptable risks or if such regulatory agencies find deficiencies in the conduct of the trials or other problems with our products under development.  Delays or rejections may be encountered based on additional governmental regulation, legislation, administrative action or changes in FDA or other regulatory policy during development or the review process.  Other risks associated with our product development programs are described underin the headingsection entitled “Risk Factors” incorporated by reference intoin Part II,I, Item 1A of our QuarterlyAnnual Report on Form 10-Q for the fiscal period ended June 30, 200910-K as updated from time to time in our subsequentother periodic reports and current reports filed with the SEC.  Due to these uncertainties, accurate and meaningful estimates of the ultimate cost to bring a product to market, the timing of completion of any of our drug development programs and the period in which material net cash inflows from any of our drug development programs will commence are unavailable.

General and administrative expenses decreasedincreased by $4.8 million,$448,000, or 58%11%, to $3.5$4.6 million in the three-month period ended September 30, 2009,March 31, 2010, compared to $8.3$4.1 million in the corresponding period in 2008.  Professional fees decreased2009.  Personnel expenses increased by $4.7 million$427,000 due to $1.0 millionsalary increases and annual performance awards, including the impact of higher stock-based compensation expense, and increases in the three-month period ended September 30, 2009, comparedoverhead and general expenses of $299,000.  These increases were partially offset by a decrease in professional services of $262,000 primarily due to $5.7 million in the corresponding period in 2008, due primarily toa reduction in activities and costs related to corporate and commercial development initiatives, and to our patent infringement litigation against Eli Lilly and Company, or Lilly, and Amgen Inc., or Amgen.initiatives.  We expect that our general and administrative expenses will remain relatively unchanged duringat approximately the fourth quartercurrent levels over the remaining quarters of 2009.

Interest income decreased to $29,000$8,000 in the three-month period ended September 30, 2009March 31, 2010 from $238,000$37,000 in the corresponding period in 2008,2009, as a result of a lower average balance of funds invested in 2010 and lower interest yields from our investments in 2009.investments.

Interest expense decreased to $65,000remained relatively unchanged at $71,000 in the three-month period ended September 30, 2009 from $147,000March 31, 2010 and $81,000 in the corresponding period in 2008, as a result of lower average loan balances in 2009 and lower interest rates on our long-term debt.2009.

The fair value at September 30, 2009 of our warrant liability at March 31, 2010 was $5.1$6.1 million higher than its fair value at June 30,December 31, 2009, resulting in a non-cash charge of $5.1$6.1 million for the three-month period ended September 30, 2009.March 31, 2010.  The increase in value of the warrant liability is primarily due to the impact of the increase in the market price of our common stock during the three months ended September 30,since December 31, 2009.  Potential future increases or decreases in the price of our common stock, price, or other changes in the factors that impact the valuation of the warrant liability, will result in charges or credits recognized in our consolidated statement of operations in future periods. Such charges or credits will not have any impact on our cash balances, current liquidity or cash flows from operations.

We reported a loss from operations of $15.7$17.3 million in the three-month period ended September 30, 2009March 31, 2010 compared to a loss from operations of $20.1$20.0 million in the corresponding period in 2008,2009, a decrease of $4.4$2.7 million, or 22%14%.  We also reported a net loss of $20.8$23.4 million in the three-month period ended September 30, 2009,March 31, 2010, compared to a net loss of $20.0$20.2 million in the corresponding period in 2008,2009, an increase in net loss of $816,000$3.2 million or 4%16%, and a net loss per share of $0.21 and $0.29,$0.26, respectively.  We expect that our loss from operations and ourThe increase in net loss excluding the impact ofis largely due to the revaluation of our warrant liability will increase slightly during the fourth quarter of 2009described above.  The decrease in net loss per share is largely due to the various factors discussed under “Revenue”increase in our weighted average number of shares of common stock outstanding as a result of sales of common stock completed in February 2009 and “Operating Expenses” above.  ActualAugust 2009.   Our results of operations for the remaining quarters of 2010 will vary from those of the quarter ended March 31, 2010 and actual losses will depend on a number of factors, including the accounting treatment to be applied to the License Agreement with Merck and other impacts of this agreement on our expenses, the progress of our product development programs, the progress of our discovery research programs, the impact of commercial and business development activities and developments in our legal proceedings, among other factors.  The extent of such losses will also depend on the sufficiency of funds on hand or available from time to time, which will influence the amount we will spend on R&Doperations and other activitiescapital expenditures and the development timelines for our product candidates.

We have financed our operations and investments to date primarily through sales of our common stock to institutional investors, and through funding from research and development collaboration agreementscollaborations with pharmaceutical companies and, to a lesser extent, through issuances of our common stock pursuant to our stock option and employee stock purchase plans, supplemented by the useissuance of banklong-term debt.  We sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs.  Our collaborationLicense Agreement with Merck for the development, manufacture and commercialization of ridaforolimus provides for additional funding in the form of up-front and potential milestone payments as well as the sharingand, subject to regulatory approval, royalty payments on sales of development costs for ridaforolimus.  We seek to balance the level of cash,ca sh, cash equivalents and marketable securities on hand with our projected needs and to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms.

For the three months ended March 31, 2010 and nine months ended September 30, 2009, and 2008, our sources of funds were as follows:

The amount of funding we raise through sales of our common stock depends on many factors, including, but not limited to, the status and progress of our product development programs, projected cash needs, availability of funding from other sources, our stock price and the status of the capital markets.

We have filed shelf registration statements with the U.S. Securities and Exchange Commission (“SEC”),SEC, from time to time, to register shares of our common stock or other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate.  On January 30, 2007,11, 2010, we filed a shelf registration statement with the SEC for the issuance of common stock, preferred stock, various series of debt securities and/or warrants or rights to purchase any of such securities, either individually or in units, with a total value of up to $100$125 million, from time to time at prices and on terms to be determined at the time of any such offerings.offering.  This filing was declared effective on February 6, 2007.

The primary uses of our cash are to fund our operations and working capital requirements and, to a lesser degree, to repay our long-term debt, to invest in intellectual property and to invest in our property and equipment as needed for our business.  For the three months ended March 31, 2010 and nine months ended September 30, 2009, and 2008, our uses of funds were as follows:

The net cash used in operating activities is comprised of our net losses, adjusted for non-cash expenses, deferred revenue, including deferrals of the up-front and milestone payments received from Merck, and working capital changes.requirements.  As noted above, our net loss for the nine monthsthree-month period ended September 30, 2009March 31, 2010 increased by $7.7$3.2 million, as compared to the corresponding period in 2008,2009, due primarily to non-cash charges related to the revaluation of our warrant liability.  As a result of changes in our working capital, ourOur net cash used in operating activities decreasedincreased by $368,000$4.2 million in the nine-monththree-month period ended September 30, 2009March 31, 2010 as compared to the corresponding period in 2008.  As noted above, we expect that our2009 reflecting the increase in net loss from operations will increase slightly inand the fourth quarteroffsetting impacts of 2009 duethe non-cash charge of $6.1 million related to the various factors discussed above.  We also expect that our investmentswarrant liability in intangible assets, consisting2010, a net change in other working capital items of our intellectual property,$4.9 million, and property and equipment will decreasea $12. 5 million milestone payment received from Merck in the fourth quarter of 2009.

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities for financial partnerships, such as entities often referred to as structured finance or special purpose entities which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As of September 30, 2009,March 31, 2010, we maintained an outstanding letter of credit of $699,000$749,000 in accordance with the terms of our long-term lease for our office and laboratory facility.facility and for other purposes.

We have substantial fixed contractual obligations under various researchour long-term debt agreement, operating and licensingcapital lease agreements, consulting and employment agreements lease agreements and long-term debt instruments.benefit plans.  These non-cancellable contractual obligations were comprised of the following as of September 30, 2009:March 31, 2010: