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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

          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.

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

          Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

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CELL THERAPEUTICS, INC.

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CELL THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

See accompanying notes.

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CELL THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

See accompanying notes.

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CELL THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

See accompanying notes.

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CELL THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

          The accompanying unaudited financial information of Cell Therapeutics, Inc. as of March 31, 2003 and for the three months ended March 31, 2003 and 2002 has been prepared in accordance with the instructions to Form 10-Q.  In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the financial position at such date and the operating results and cash flows for such periods.  Operating results for the three month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the entire year.  These financial statements and the related notes should be read in conjunction with our audited annual financial statements for the year ended December 31, 2002 included in our Form 10-K/A.

          The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

     License Agreement Revenues

          We may generate revenue from technology licenses, collaborative research and development arrangements, and cost reimbursement contracts.  Revenue under technology licenses and collaborative agreements typically consists of nonrefundable and/or guaranteed technology license fees, collaborative research funding, and various milestone and future product royalty or profit-sharing payments.

          Revenue associated with up-front license fees, and research and development funding payments under collaborative agreements is recognized ratably over the relevant periods specified in the agreement, generally the research and development period.  Revenue from substantive at-risk milestones and future product royalties is recognized as earned based on the completion of the milestones and product sales, as defined in the respective agreements.  Revenue under cost reimbursement contracts is recognized as the related costs are incurred.  Payments received in advance of recognition as revenue are recorded as deferred revenue.

     Product Sales

          We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured.  Product sales are recorded net of an allowance for returns and discounts.  Allowances for discounts, returns and bad debts, which are netted against accounts receivable, totaled approximately $758,000 and $859,000 at March 31, 2003 and December 31, 2002, respectively.

     Inventory

          Inventory is stated at the lower of cost or market.  Cost is determined using a weighted-average approach that approximates the first-in first-out method.  Finished goods inventory consists of our FDA-approved pharmaceutical drug, TRISENOX.  Prior to FDA approval, the raw material and production costs of TRISENOX were recorded as research and development expense.  If the cost of the inventory exceeds the expected market value, provisions are recorded currently for the difference between the cost and the market value.  When required, an allowance for excess inventory that may expire and become unsaleable is recorded.  The components of inventories are as follows (in thousands):

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     Research and Development Expenses

          Research and development expenses include related salaries and benefits, clinical trial and related clinical manufacturing costs, contract and other outside service fees, and facilities and overhead costs.  Research and development expenses consist of costs incurred for proprietary and collaboration research and development and also include activities such as product registries and investigator sponsored trials.  Research and development costs are expensed as incurred.  In instances where we enter into agreements with third parties for research and/or clinical trial activities, costs are expensed upon the earlier of when amounts are due or when services are performed.

     Derivative Financial Instruments

          Effective at the beginning of fiscal 2001, we adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended.  We are subject to risks associated with fluctuations in the LIBOR interest rate from lease payments on our aircraft.  Our policy is to hedge a portion of these forecasted transactions through an interest rate swap agreement.  This swap agreement has been designated as a cash flow hedge.  The portion of the net loss on the derivative instrument that is effective as a hedge is reported as a component of accumulated other comprehensive loss in shareholders’ equity and is reclassified into earnings in the same period during which the hedged transaction affects earnings.  The remaining net loss on the derivative in excess of the present value of the expected cash flows of the hedged transaction is recorded in earnings immediately.  If a derivative does not qualify for hedge accounting, or a portion of the hedge is deemed ineffective, the change in fair value is recorded in earnings.  The swap was perfectly effective at March 31, 2003 and December 31, 2002.  We do not enter into forward agreements for trading purposes.

     Reclassifications

          Certain prior year items have been reclassified to conform to current year presentation.

2.  Comprehensive Loss

          SFAS 130, Reporting Comprehensive Income, includes unrealized gains and losses on our securities available-for-sale and interest rate swap agreement, designated as a cash flow hedge, to be included in other comprehensive loss.  Total comprehensive loss was $30.5 million and $24.2 million for the three month periods ended March 31, 2003 and 2002, respectively. 

          Information regarding the components of accumulated other comprehensive loss is as follows (in thousands):

3.  Stock-Based Compensation

          In accordance with SFAS 123, Accounting for Stock-Based Compensation, we elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion, or APB, 25, Accounting for Stock Issued to Employees, and related interpretations.  Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of our common stock at the date of grant over the stock option exercise price.  Any deferred compensation is recognized on a graded vesting method.  Under our plan, stock options are generally granted at fair market value.

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          In accordance with the provisions of SFAS 123, we apply APB 25 and related interpretations in accounting for our stock option plans and, accordingly, do not recognize compensation cost for options granted with exercise prices equal to or greater than fair value.  If we elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123, net loss and basic and diluted net loss and basic and diluted net loss per share would have been adjusted, or increased, as follows (in thousands, except per share amounts):

          Fair value is determined using a Black-Scholes option pricing model that takes into account (1) the stock price at the grant date, (2) the exercise price, (3) an assumed four and a half-year expected life for 2003 and 2002, (4) no expected dividends, (5) a risk-free interest rate of 2.7% and 3.0% in 2003 and 2002, respectively, and (6) a volatility factor of 1.04 and 1.05, in 2003 and 2002, respectively.  The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts.

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          This quarterly report on Form 10-Q contains, in addition to historical information, forward-looking statements which involve risks and uncertainties.  These statements relate to our future plans, objectives, expectations, intentions and financial performance, and assumptions that underlie these statements.  When used in this Form 10-Q, the words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” should,” or “will” or the negative of those terms or other comparable terms are intended to identify such forward-looking statements.  These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements.  Our actual results may differ significantly from the results discussed in such forward-looking statements.  These factors include those listed under “Factors Affecting Our Operating Results and Financial Condition,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

OVERVIEW

          We develop, acquire and commercialize novel treatments for cancer.  Our goal is to build a leading, vertically-integrated biopharmaceutical company with a diversified portfolio of proprietary oncology drugs.  Our research and in-licensing activities are concentrated on identifying new, less toxic and more effective ways to treat cancer.  As of March 31, 2003, we had incurred aggregate net losses of approximately $370.9 million since inception.  We expect to continue to incur significant additional operating losses over the next several years from our research and development efforts.  Operating losses may fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and revenues recognized.

XYOTAX

          In June 1998, we entered into an agreement with PG-TXL Company, L.P. and scientists at the M.D. Anderson Cancer Center, granting us an exclusive worldwide license to the rights to PG-TXL, and to all potential uses of PG-TXL’s polymer technology.  PG-TXL is paclitaxel linked to polyglutamate, and is branded as XYOTAX™.  Under the terms of the agreement, we will fund the research, development, manufacture, marketing and sale of drugs developed using PG-TXL’s polymer technology.  We will be obligated to make future milestone payments upon the attainment of significant achievements, as defined in the agreement of up to $15.5 million, and royalty payments on net product sales.  As of March 31, 2003, we have made $5.0 million in milestone payments.

          In September 2001, we entered into a supply agreement with Natural Pharmaceuticals, Inc. for paclitaxel, a key starting material for our XYOTAX drug candidate.  Under the supply agreement, we purchased paclitaxel at a pre-determined price and will receive supply through early 2004.

          In October 2001, we entered into a licensing agreement with Chugai Pharmaceutical Co., Ltd., or Chugai, for the development and commercialization of XYOTAX.  This agreement grants an exclusive license to Chugai to develop and commercialize XYOTAX in several Asian markets.  Upon execution of the agreement, Chugai paid us a $3.0 million initial payment, which has been recorded as deferred revenue and is being recognized as license revenue over the development period on a straight-line basis.  Under the agreement, we received and recognized as revenue a $3.0 million milestone payment during 2002, we may also receive milestone payments totaling up to $13.0 million upon Chugai’s achievement of certain product development milestones, and we are entitled to receive royalties on product sales in the territories covered under the agreement.  Chugai has also committed to incur up to $54 million in development expenditures over the course of the licensing agreement.  During 2002, we initiated a XYOTAX phase III clinical trial for second-line treatment of non-small cell lung cancer, and two additional phase III trials of XYOTAX in the front line treatment of poor performance status patients with non-small cell lung cancer.

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          In November 2002, we announced that the Gynecologic Oncology Group, or GOG, plans to conduct a phase III trial of XYOTAX in front-line treatment of ovarian cancer.  This trial is expected to begin in 2003.  We had initiated a XYOTAX phase III ovarian clinical trial in July 2002, but have since closed this trial as a result of the GOG’s decision to conduct the trial for us.

          TRISENOX

          In January 2000, we acquired TRISENOX upon our acquisition of PolaRx Biopharmaceuticals, Inc., or PolaRx, a single product company that owned the rights to TRISENOX.  The aggregate purchase price of approximately $36.2 million consisted primarily of five million shares of common stock and included assumed net liabilities of $3.9 million from PolaRx.  In connection with the achievement of a $10 million sales threshold, we recorded $4.0 million in additional goodwill and a current liability in the fourth quarter of 2002, of which $3.8 million was paid during the first quarter of 2003.  We expect to pay the remaining balance during the second quarter of 2003.  An additional $5.0 million payout tied to a sales threshold of $20 million in any four consecutive quarters is payable in cash or common stock with a market value of $5 million, within thirty days following the end of the first calendar quarter after the end of the previous four calendar quarter period in which such threshold is achieved.  For any calendar year that sales of TRISENOX exceed $40 million, PolaRx shareholders will receive a 2% royalty on total net sales for that year payable in cash or common stock at the then fair market value of our common stock, payable within thirty days following the end of the calendar year.  The acquisition was accounted for as a purchase transaction.  Any additional or contingent payments made to PolaRx shareholders will be considered additional purchase price and will be capitalized as additional goodwill.

          In September 2000, we received approval of our New Drug Application, or NDA, by the Food and Drug Administration, or FDA, for TRISENOX (arsenic trioxide), commenced sales in October 2000 and have recorded cumulative net product sales for TRISENOX of approximately $22.3 million through March of 2003.  In March 2002, we received from the European Agency for the Evaluation of Medicinal Products, or EMEA, approval to market TRISENOX in the European Community, or EU.  We commenced the launch and sale of TRISENOX in the EU during the second quarter of 2002.  TRISENOX is manufactured primarily by a single vendor and sold through our direct sales force.

          In December 2002, we entered into a distribution agreement with Nippon Shinyaku Co. Ltd., or Nippon.  This agreement grants an exclusive license to Nippon to market and distribute TRISENOX (arsenic trioxide) injection in Japan, South Korea, and Taiwan.  Upon execution of the agreement, Nippon paid us a $750,000 initial payment, which we recorded as deferred revenue and which is being recognized as revenue over the performance period on a straight-line basis.  Under the agreement, we may also receive future milestone payments totaling up to $4.0 million upon attainment of certain achievements.

Other Compounds

          We are developing a novel polyglutamate-camptothecin molecule, or PG-CPT.  We filed a U.S. investigational new drug application, or IND, in December 2001 for this compound, and initiated a phase I clinical study in the first quarter of 2002.

          We have identified a novel drug target called lysophosphatidic acid acyltransferase, or LPAAT-ß, that when inhibited has been shown to reduce tumor cell growth in preclinical models.  We are in the process of identifying a lead candidate during 2003 for future clinical development.

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Critical Accounting Policies

          In December 2001, the SEC requested that all registrants discuss their most “critical accounting policies” in management’s discussion and analysis of financial condition and results of operations.  The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  We believe the following accounting policies to be critical:

     License Agreement Revenues

          We may generate revenue from technology licenses, collaborative research and development arrangements, and cost reimbursement contracts.  Revenue under technology licenses and collaborative agreements typically consists of nonrefundable and/or guaranteed technology license fees, collaborative research funding, and various milestone and future product royalty or profit-sharing payments.

          Revenue associated with up-front license fees, and research and development funding payments under collaborative agreements is recognized ratably over the relevant periods specified in the agreement, generally the research and development period.  If the time period is not defined in the agreement, we calculate the revenue recognition period based on our current estimate of the research and development period considering experience with similar projects, level of effort and the stage of development.  Should there be a change in our estimate of the research and development period, we will revise the term over which the initial payment is recognized.  Revenue from substantive at-risk milestones and future product royalties is recognized as earned based on the completion of the milestones and product sales, as defined in the respective agreements.  Revenue under cost reimbursement contracts is recognized as the related costs are incurred.  Payments received in advance of recognition as revenue are recorded as deferred revenue.

     Product Sales

          We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured.  Generally, product sales are recorded upon shipment to distributors.  Product sales are recorded net of an allowance for estimated returns, and discounts based on historical experience.  In estimating returns, we analyze historical returns, sales patterns, current inventory on hand at the distributors and the remaining shelf life of that inventory. In arriving at the accrual for product returns we match the returns to the corresponding production batch to assess the historical trend for returns. Based on this analysis, the estimated return percentage is applied to current period sales.  Allowances for discounts, returns and bad debts are netted against accounts receivable.

     Inventory

          Inventory is stated at the lower of cost or market.  Cost is determined using a weighted-average approach that approximates the first-in first-out method.  Finished goods inventory consists of our FDA-approved pharmaceutical drug, TRISENOX.  Prior to FDA approval, the raw material and production costs of TRISENOX were recorded as research and development expense.  We also record an allowance for inventory that may expire and become unsaleable due to the expiration of shelf life.  In estimating inventory obsolescence reserves, we analyze (i) the shelf life and the expiration date, (ii) sales forecasts and (iii) inventory levels compared to forecasted usage.  Judgment is required in determining whether the forecasted sales and usage information is sufficiently reliable to enable us to estimate inventory obsolescence reserve.

     Research and Development Expenses

          Research and development expenses include related salaries and benefits, clinical trial and related clinical manufacturing costs, contract and other outside service fees, and facilities and overhead costs.  Research and development expenses consist of costs incurred for proprietary and collaboration research and development and also include activities such as investigator and company

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sponsored clinical trials, production of clinical supplies and regulatory costs associated with product registries.  Research and development costs are expensed as incurred.  In instances where we enter into agreements with third parties for research and/or clinical trial activities, costs are expensed upon the earlier of when amounts are due or when services are performed.

     Derivative Financial Instruments

          Effective at the beginning of fiscal 2001, we adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended.  We are subject to risks associated with fluctuations in the LIBOR interest rate from lease payments on our aircraft.  Our policy is to hedge a portion of these forecasted transactions through an interest rate swap agreement.  This swap agreement has been designated as a cash flow hedge.  The portion of the net loss on the derivative instrument that is effective as a hedge is reported as a component of accumulated other comprehensive loss in shareholders’ equity and is reclassified into earnings in the same period during which the hedged transaction affects earnings.  The remaining net loss on the derivative in excess of the present value of the expected cash flows of the hedged transaction is recorded in earnings immediately.  If a derivative does not qualify for hedge accounting, or a portion of the hedge is deemed ineffective, the change in fair value is recorded in earnings.  The swap was perfectly effective at March 31, 2003 and December 31, 2002.  We do not enter into forward agreements for trading purposes.

RESULTS OF OPERATIONS

     Three months ended March 31, 2003 and 2002.

          Product sales.  In October 2000, we launched TRISENOX, a pharmaceutical grade arsenic product that has been approved by the FDA to treat patients with relapsed or refractory acute promyelocytic leukemia.  We recorded net product sales of approximately $4.3 million and $1.5 million for TRISENOX for the three months ended March 31, 2003 and 2002, respectively.  The increase in net sales is primarily due to greater demand for our product in 2003.  We expect our net sales to continue to increase during 2003.

          License and contract revenue.  In October 2001, we entered into a licensing agreement with Chugai Pharmaceutical Co., Ltd., or Chugai, for the development and commercialization of XYOTAX.  Upon execution of the agreement, Chugai paid us a $3.0 million initial payment, which we recorded as deferred revenue and which is being recognized as revenue over the estimated development period of approximately six years on a straight-line basis.  In December 2002, we entered into a distribution agreement with Nippon Shinyaku Co., Ltd., or Nippon, for the distribution and commercialization of TRISENOX.  We received $750,000 upon execution of the agreement which we recorded as deferred revenue and which is being recognized as revenue on a straight-line basis over the estimated time to receive marketing authorization application approval.  For the three months ended March 31, 2003, we recognized approximately $571,000 of license and contract revenue, of which $319,000 related to cost reimbursements for development expenses received from Chugai, and $252,000 related to the amortization of the initial payments from Chugai and Nippon.  For the three months ended March 31, 2002, we recognized $162,000 of license and contract revenue of which $131,000 related to the initial payment from Chugai.

          Cost of product sold.  The cost of product sold during the three months ended March 31, 2003 and 2002 was approximately $146,000 and $105,000, respectively.  Our gross margins have improved mainly due to lower manufacturing costs.  Cost of product sold consists primarily of manufacturing costs, allowances for excess inventory that may expire and become unsaleable, and royalties paid on product sales. We expect product costs in the future to continue to approximate a small percentage of revenue. 

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          Research and development expenses.  Our research and development expenses for compounds under development and discovery research are as follows (in thousands):

          Costs for compounds under development include external direct expenses such as principal investigator fees, clinical research organization charges and contract manufacturing fees incurred for preclinical, clinical, manufacturing and regulatory activities associated with preparing the compounds for submissions of new drug applications to the FDA or similar regulatory filings with agencies outside the U.S.  Operating costs include our personnel and occupancy expenses associated with developing these compounds.  Discovery research costs include primarily personnel, occupancy, and laboratory expenses associated with the discovery and identification of new drug targets and lead compounds.  We do not allocate operating costs to the individual compounds under development.

          Research and development expenses increased to approximately $20.6 million for the three months ended March 31, 2003, from approximately $11.1 million for the three months ended March 31, 2002.  Costs for our XYOTAX program increased primarily due to approximately $8.2 million of clinical and manufacturing costs associated with the set up and initiation of phase III clinical trials as well as several other clinical trials, and approximately $600,000 for preclinical development costs related to our agreement with Chugai.  TRISENOX costs decreased approximately $400,000 primarily as a result of decreased manufacturing costs for clinical supply.  We also incurred additional personnel, occupancy and operating expenses of approximately $1.3 million related to our expanded development plans for XYOTAX, TRISENOX, PG-CPT and our discovery research.  We anticipate increased research and development expenses in connection with our clinical development plans for XYOTAX and our other products.

          Selling, general and administrative expenses.  Selling, general and administrative expenses increased to approximately $13.0 million for the three months ended March 31, 2003, from approximately $11.2 million for the three months ended March 31, 2002.  This increase is primarily attributed to approximately $1.8 million of additional marketing costs for TRISENOX and personnel costs due to the expansion of our sales force.  We expect selling, general and administrative expenses to increase in the future to support our expected increase in research, development and commercialization efforts.  Additionally, due to the variable accounting treatment of certain stock options, fluctuations in quoted prices for our common stock may result in unpredictable and potentially significant charges or credits to our stock-based compensation.

          Amortization of purchased intangibles.  In January 2000, we acquired PolaRx Biopharmaceuticals, Inc. which was accounted for using the purchase method of accounting.  Our intangible assets were obtained upon this acquisition.  Amortization for the three months ended March 31, 2003 decreased to approximately $334,000 from approximately $1.7 million for the three months ended March 31, 2002, due to a marketing intangible asset that became fully amortized in December 2002.

          Investment income.  Investment income decreased to approximately $654,000 for the three months ended March 31, 2003 from approximately $1.7 million for the three months ended March 31, 2002.  This decrease is attributed to lower average cash and securities available-for-sale balances during the three months ended March 31, 2003.

          Interest expense.  Interest expense decreased to approximately $1.9 million for the three months ended March 31, 2003 from approximately $2.9 million for the three months ended March 31, 2002.  In December 2002, we

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completed an exchange offer for our convertible subordinated notes, in which approximately $145.4 million of our convertible subordinated notes were tendered in exchange for approximately $85.5 million of our new convertible senior subordinated notes.  The decrease in interest expense is attributable to this exchange.

LIQUIDITY AND CAPITAL RESOURCES

          As of March 31, 2003, we had approximately $111.1 million in cash, cash equivalents, securities available-for-sale and interest receivable.

          Net cash used in operating activities increased to approximately $25.2 million during the three months ended March 31, 2003, compared to approximately $14.9 million for the same period during 2002.  The increase in net cash used in operating activities during the three months ended March 31, 2003, as compared to the same period in 2002, was primarily due to the increase in our net loss and changes in accounts payable and accrued expenses.

          We expect the amount of net cash used in operating activities in 2003 to be consistent with the amount of net cash used in 2002.  The extent of cash flow used in operating activities will be significantly affected by our expanded development plans for XYOTAX and our ability to offset the related development expenses by licensing XYOTAX in Europe. 

          Net cash provided by investing activities increased to approximately $18.4 million during the three months ended March 31, 2003, compared to approximately $3.3 million for the same period during 2002.  The increase in net cash provided by investing activities during the three months ended March 31, 2003, as compared to the same period in 2002, was primarily due to a decrease in purchases of securities available-for-sale offset by a decrease in proceeds from sales and maturities of securities available-for-sale and payment of approximately $3.8 million of our liability to PolaRx.

          Net cash used in financing activities totaled approximately $191,000 during the three months ended March 31, 2003, compared to net cash provided by financing activities of approximately $20,000 for the same period during 2002.  The increase in net cash used is due to a decrease in proceeds from common stock options exercised during 2003 and an increase in repayments of long-term obligations during 2003.

          We expect to generate losses from operations for several years due to substantial additional research and development costs, including costs related to clinical trials, and increased sales and marketing expenditures.  We expect that our existing capital resources will enable us to maintain our current and planned operations through at least mid 2004.  Our future capital requirements will depend on many factors, including:

          Future capital requirements will also depend on the extent to which we acquire or invest in businesses, products and technologies.  If we should require additional financing due to unanticipated developments, additional financing may not be available when needed or, if available, we may not be able to obtain this financing on terms favorable to us or to our shareholders.  Insufficient funds may require us to delay, scale back or eliminate some or all of our research and development programs, or may adversely affect our ability to operate as a going concern.  If additional funds are raised by issuing equity securities, substantial dilution to existing shareholders may result.

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Risk Factors

     Factors Affecting Our Operating Results and Financial Condition

          This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this quarterly report on Form 10-Q.

We may continue to incur net losses, and we may never achieve profitability.

          We were incorporated in 1991 and have incurred a net operating loss every year. As of March 31, 2003, we had an accumulated deficit of approximately $370.9 million. We may never become profitable, even if we are able to commercialize additional products. We will need to conduct significant research, development, testing and regulatory compliance activities that, together with projected general and administrative expenses, we expect will result in substantial increasing operating losses for at least the next several years.  Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

If we do not successfully develop additional products, we may be unable to generate additional revenue.

          We have only one product, TRISENOX, for relapsed or refractory APL, that has received marketing approval to date. Our leading drug candidates, TRISENOX for other indications, XYOTAX and PG-CPT, are currently in clinical trials. These clinical trials of the drug candidates involve the testing of potential therapeutic agents, or effective treatments, in humans in three phases to determine the safety and efficacy of the drug candidates necessary for an approved drug. Many drugs in human clinical trials fail to demonstrate the desired safety and efficacy characteristics. Even if our drugs progress successfully through initial human testing, they may fail in later stages of development. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in advanced clinical trials, even after reporting promising results in earlier trials. For example, in our first phase III human trial for lisofylline, completed in March 1998, we failed to meet our two primary endpoints, or goals, even though we met our endpoints in two earlier phase II trials for lisofylline. As a result, we are no longer developing lisofylline as a potential product. In addition, data obtained from clinical trials are susceptible to varying interpretations. Government regulators and our collaborators may not agree with our interpretation of our future clinical trial results. The clinical trials of TRISENOX, XYOTAX and PG-CPT or any of our future drug candidates may not be successful.

          Many of our drug candidates are still in research and preclinical development, which means that they have not yet been tested on humans. We will need to commit significant time and resources to develop these and additional product candidates. We are dependent on the successful completion of clinical trials and obtaining regulatory approval in order to generate revenues. The failure to generate such revenues may preclude us from continuing our research and development of these and other product candidates.

Even if our drug candidates are successful in clinical trials, we may not be able to successfully commercialize them.

          Since our inception in 1991, we have dedicated substantially all of our resources to the research and development of our technologies and related compounds. With the exception of TRISENOX for relapsed or refractory APL, all of our compounds currently are in research or development, and none has been submitted for marketing approval. Our other compounds may not enter human clinical trials on a timely basis, if at all, and we may not develop any product candidates suitable for commercialization. Prior to commercialization, each product candidate will require significant additional research, development and preclinical testing and extensive clinical investigation before submission of any regulatory application for marketing approval. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. Potential products may:

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          Our product development efforts or our collaborative partners’ efforts may not be successfully completed and we may not obtain required regulatory approvals. Any products, if introduced, may not be successfully marketed nor achieve customer acceptance.

Because we based several of our drug candidates on unproven novel technologies, we may never develop them into commercial products.

          We base many of our product candidates upon novel delivery technologies that we are using to discover and develop drugs for the treatment of cancer. These technologies have not been proven. Furthermore, preclinical results in animal studies may not predict outcome in human clinical trials. Our product candidates may not be proven safe or effective. If these technologies do not work, our drug candidates may not develop into commercial products.

We may not complete our clinical trials in the time expected, which could delay or prevent the commercialization of our products.

          Although for planning purposes we forecast the commencement and completion of clinical trials, the actual timing of these events can vary dramatically due to factors such as delays, scheduling conflicts with participating clinicians and clinical institutions and the rate of patient enrollment. Clinical trials involving our product candidates may not commence nor be completed as forecasted. We have limited experience in conducting clinical trials. In certain circumstances we rely on academic institutions or clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our products. In addition, certain clinical trials for our products will be conducted by government-sponsored agencies and consequently will be dependent on governmental participation and funding. We will have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. These trials may not commence or be completed as we expect. They may not be conducted successfully. Failure to commence or complete, or delays in, any of our planned clinical trials could delay or prevent the commercialization of our products and harm our business.

If we fail to adequately protect our intellectual property, our competitive position could be harmed.

          Development and protection of our intellectual property are critical to our business. If we do not adequately protect our intellectual property, competitors may be able to practice our technologies. Our success depends in part on our ability to:

          In particular we believe that linking our polymers to existing drugs may yield patentable subject matter. We do not believe that our polymer-drug conjugates will infringe any valid third-party patents covering the underlying drug. However, we may not receive a patent for our polymer conjugates and we may be challenged by the holder of a patent covering the underlying drug.

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          The patent position of biopharmaceutical firms generally is highly uncertain and involves complex legal and factual questions. The U.S. Patent and Trademark Office has not established a consistent policy regarding the breadth of claims that it will allow in biotechnology patents. If it allows broad claims, the number and cost of patent interference proceedings in the U.S. and the risk of infringement litigation may increase. If it allows narrow claims, the risk of infringement may decrease, but the value of our rights under our patents, licenses and patent applications may also decrease.

          Patent applications in which we have rights may never issue as patents and the claims of any issued patents may not afford meaningful protection for our technologies or products. In addition, patents issued to us or our licensors may be challenged and subsequently narrowed, invalidated or circumvented. Litigation, interference proceedings or other governmental proceedings that we may become involved in with respect to our proprietary technologies or the proprietary technology of others could result in substantial cost to us. Patent litigation is widespread in the biotechnology industry, and any patent litigation could harm our business. Costly litigation might be necessary to protect our orphan drug designations or patent position or to determine the scope and validity of third party proprietary rights, and we may not have the required resources to pursue such litigation or to protect our patent rights. An adverse outcome in litigation with respect to the validity of any of our patents could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using a product or technology.

          We also rely upon trade secrets, proprietary know-how and continuing technological innovation to remain competitive. Third parties may independently develop such know-how or otherwise obtain access to our technology. While we require our employees, consultants and corporate partners with access to proprietary information to enter into confidentiality agreements, these agreements may not be honored.

If any of our license agreements for intellectual property underlying TRISENOX, XYOTAX or any other products are terminated, we may lose our rights to develop or market that product.

          Patents issued to third parties may cover our products as ultimately developed. We may need to acquire licenses to these patents or challenge the validity of these patents. We may not be able to license any patent rights on acceptable terms or successfully challenge such patents. The need to do so will depend on the scope and validity of these patents and ultimately on the final design or formulation of the products and services that we develop.

          We have licensed intellectual property, including patent applications from The Memorial Sloan Kettering Cancer Center, Samuel Waxman Cancer Research Foundation, Beijing Medical University and others, including the intellectual property directed to arsenic drugs and TRISENOX. We have also in-licensed the intellectual property relating to our polymer drug delivery technology, including XYOTAX. Some of our product development programs depend on our ability to maintain rights under these licenses. Each licensor has the power to terminate its agreement with us if we fail to meet our obligations under those licenses. We may not be able to meet our obligations under these licenses. If we default under any of these license agreements, we may lose our right to market and sell any products based on the licensed technology.

Our products could infringe on the intellectual property rights of others, which may cause us to engage in costly litigation and, if we are not successful, could cause us to pay substantial damages and prohibit us from selling our products.

          Although we attempt to monitor the patent filings of our competitors in an effort to guide the design and development of our products to avoid infringement, third parties may challenge the patents that have been issued or licensed to us. We may have to pay substantial damages, possibly including treble damages, for past infringement if it is ultimately determined that our products infringe a third party’s patents. Further, we may be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial royalties. Even if infringement claims against us are without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns.

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Our limited operating experience may cause us difficulty in managing our growth and could seriously harm our business.

          As a result of additional trials for TRISENOX for indications other than relapsed or refractory APL and clinical trials currently underway for XYOTAX and our other products in development, we have expanded our operations in various areas, including our management, regulatory, clinical, financial and information systems and other elements of our business process infrastructure. We may need to add additional key personnel in these areas. In addition, as growth occurs, it may strain our operational, managerial and financial resources. We will not be able to increase revenues or control costs unless we continue to improve our operational, financial, regulatory and managerial systems and processes, and expand, train and manage our work force.

If we fail to keep pace with rapid technological change in the biotechnology and pharmaceutical industries, our products could become obsolete.

          Biotechnology and related pharmaceutical technology have undergone and are subject to rapid and significant change. We expect that the technologies associated with biotechnology research and development will continue to develop rapidly. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any compounds, products or processes that we develop may become obsolete before we recover any expenses incurred in connection with developing these products.

We face direct and intense competition from our rivals in the biotechnology and pharmaceutical industries and we may not compete successfully against them.

          The biotechnology and pharmaceutical industries are intensely competitive. We have numerous competitors in the United States and elsewhere. Our competitors include major, multinational pharmaceutical and chemical companies, specialized biotechnology firms and universities and other research institutions. Many of these competitors have greater financial and other resources, larger research and development staffs and more effective marketing and manufacturing organizations, than we do. In addition, academic and government institutions have become increasingly aware of the commercial value of their research findings. These institutions are now more likely to enter into exclusive licensing agreements with commercial enterprises, including our competitors, to market commercial products.

          Our competitors may succeed in developing or licensing technologies and drugs that are more effective or less costly than any we are developing. Our competitors may succeed in obtaining FDA or other regulatory approvals for drug candidates before we do. In particular, we face direct competition from many companies focusing on delivery technologies. Drugs resulting from our research and development efforts, if approved for sale, may not compete successfully with our competitors’ existing products or products under development.

We may need to raise additional funds in the future, and they may not be available on acceptable terms, or at all.

          We expect that our existing capital resources and the interest earned thereon will enable us to maintain our planned operations through at least mid 2004. Beyond that time, if our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds to continue the development of our technologies and complete the commercialization of products, if any, resulting from our technologies. We will require substantial funds to: (1) continue our research and development programs, (2) in-license or acquire additional technologies, (3) conduct preclinical studies and clinical trials and (4) launch new drug products.  We may need to raise additional capital to fund our operations repeatedly. We may raise such capital through public or private equity financings, partnerships, debt financings, bank borrowings, or other sources. Our capital requirements will depend upon numerous factors, including the following:

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          Additional funding may not be available on favorable terms or at all. If adequate funds are not otherwise available, we may curtail operations significantly. To obtain additional funding, we may need to enter into arrangements that require us to relinquish rights to certain technologies, drug candidates, products and/or potential markets. To the extent that additional capital is raised through the sale of equity, or securities convertible into equity, you may experience dilution of your proportionate ownership of the company.

Our stock price is extremely volatile, which may affect our ability to raise capital in the future.

          The market price for securities of biopharmaceutical and biotechnology companies, including ours, historically has been highly volatile, and the market from time to time has experienced significant price and volume fluctuations that are unrelated to the operating performance of such companies. For example, during the twelve months ended March 31, 2003, our stock price has ranged from a low of $2.68 to a high of $25.50. Fluctuations in the trading price or liquidity of our common stock may adversely affect our ability to raise capital through future equity financings.

          Factors that may have a significant impact on the market price and marketability of our common stock include:

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          In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. If a securities class action suit is filed against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business in order to respond to the litigation.

We may be unable to attain the raw materials necessary to produce our XYOTAX product candidate in sufficient quantity to meet demand when and if such product is approved.

          Paclitaxel is derived from certain varieties of yew trees. Supply of yew trees is tightly controlled by a limited number of companies. We cannot be sure that we will be able to continue to purchase the materials necessary to produce XYOTAX in adequate volume and quality.  We purchase the majority of the paclitaxel we need from a single vendor.  Should the paclitaxel purchased from this source prove to be insufficient in quantity or quality, or should this relationship terminate, there can be no assurance that we will be able to enter into a similar agreement with an alternate source.

Our dependence on third party manufacturers means that we may not have sufficient control over the manufacture of our products.

          We currently do not have internal facilities for the manufacture of any of our products for clinical evaluation or commercial production. In addition, TRISENOX, our first commercial product, is currently manufactured by a single vendor.  In 2002, we began the process of transitioning our finished product manufacturing for TRISENOX to a new additional supplier.  We believe that this additional supplier will receive FDA approval to manufacture TRISENOX in the second half of 2003.  If this approval is not received and we are unable to obtain supply from our current vendor, we may not have sufficient supply to meet our future sales demand.  We will need to develop additional manufacturing resources, enter into collaborative arrangements with other parties that have established manufacturing capabilities or elect to have other third parties manufacture our products on a contract basis. We are dependent on such collaborators or third parties to supply us in a timely way with products manufactured in compliance with standards imposed by the FDA and foreign regulatory authorities. The manufacturing facilities of contract manufacturers may not comply with applicable manufacturing regulations of the FDA nor meet our requirements for quality, quantity or timeliness. Another of our products under development, XYOTAX, is complex to manufacture, which may prevent us from obtaining a sufficient supply for the increased clinical trials that are currently planned or underway.

We may face difficulties in achieving acceptance of our products in the market if we do not continue to expand our sales and marketing infrastructure.

          We currently are marketing TRISENOX with our direct sales force.  Competition for these individuals is intense, and in the event we need additional sales personnel, we may not be able to hire the experience required and number of sales personnel we need.  In addition, if we market and sell products other than TRISENOX, we may need to further expand our marketing and sales force with sufficient technical expertise and distribution capacity.  If we are unable to expand our direct sales operations and train new sales personnel as rapidly as necessary, we may not be able to increase market awareness and sales of our products, which may prevent us from growing our revenues and achieving and maintaining profitability.

If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to pursue collaborations or develop our own products.

          We are highly dependent on Dr. James A. Bianco, our Chief Executive Officer, and Dr. Jack W. Singer, our Executive Vice President, Research Program Chairman. The loss of these principal members of our scientific or management staff, or failure to attract or retain other key scientific employees, could prevent us from pursuing collaborations or developing our products and core technologies. Recruiting and retaining qualified scientific personnel to perform research and development work are critical to our success. There is intense competition for qualified scientists and managerial personnel from numerous pharmaceutical and biotechnology companies, as well as from academic and government organizations, research institutions and other entities. In addition, we rely on consultants and advisors, including our scientific and clinical advisors, to assist us in formulating our research

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and development strategy. All of our consultants and advisors are employed by other employers or are self-employed, and have commitments to or consulting or advisory contracts with other entities that may limit their availability to us.

We are subject to extensive government regulation, including the requirement of approval before our products may be marketed.

          The FDA has approved only one of our products, TRISENOX, for sale in the United States, for relapsed or refractory APL. Before we can market TRISENOX for other indications, we must obtain FDA approval. Our other products are in development, and will have to be approved by the FDA before they can be marketed in the United States. If the FDA does not approve our products and any additional indications for marketed products in a timely fashion, or does not approve them at all, our business and financial condition may be adversely affected.

          In addition, we and our products are subject to comprehensive regulation by the FDA both before and after products are approved for marketing. The FDA regulates, for example, research and development, including preclinical and clinical testing, safety, effectiveness, manufacturing, labeling, advertising, promotion, export, and marketing of our products. Our failure to comply with regulatory requirements may result in various adverse consequences including FDA delay in approving or refusal to approve a product, recalls, withdrawal of an approved product from the market, and/or the imposition of civil or criminal sanctions.

Because there is a risk of product liability associated with our products, we face potential difficulties in obtaining insurance.

          Our business exposes us to potential product liability risks inherent in the testing, manufacturing and marketing of human pharmaceutical products, and we may not be able to avoid significant product liability exposure. While we have insurance covering product use in our clinical trials, and currently have product liability insurance for TRISENOX, it is possible that we will not be able to maintain such insurance on acceptable terms or that any insurance obtained will provide adequate coverage against potential liabilities. Our inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or limit the commercialization of any products we develop. A successful product liability claim in excess of our insurance coverage could exceed our net worth.

Uncertainty regarding third party reimbursement and health care cost containment initiatives may limit our returns.

          The ongoing efforts of governmental and third party payors to contain or reduce the cost of health care will affect our ability to commercialize our products successfully. Governmental and other third party payors are increasingly attempting to contain health care costs by:

          In addition, the trend toward managed health care in the United States, the growth of organizations such as health maintenance organizations, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reducing demand for our products.

          Even if we succeed in bringing any of our proposed products to the market, they may not be considered cost-effective and third party reimbursement might not be available or sufficient. If adequate third party coverage is not available, we may not be able to

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maintain price levels sufficient to realize an appropriate return on our investment in research and product development. In addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to us before or after any of our proposed products are approved for marketing. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the adoption of such proposals could make it difficult or impossible to sell our products. TRISENOX has been reimbursed by third party payors, but there is no guarantee this reimbursement will continue.

Since we use hazardous materials in our business, we may be subject to claims relating to improper handling, storage or disposal of these materials.

          Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated completely. In the event of such an accident, we could be held liable for any damages that result and any such liability not covered by insurance could exceed our resources. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or production efforts.

We may not be able to conduct animal testing in the future which could harm our research and development activities.

          Certain of our research and development activities involve animal testing. Such activities have been the subject of controversy and adverse publicity. Animal rights groups and other organizations and individuals have attempted to stop animal testing activities by pressing for legislation and regulation in these areas. To the extent the activities of these groups are successful, our business could be materially harmed by delaying or interrupting our research and development activities.

Because our charter documents contain certain anti-takeover provisions and we have a rights plan, it may be more difficult for a third party to acquire us, and the rights of some shareholders could be adversely affected.

          Our Restated Articles of Incorporation and Bylaws contain provisions that may make it more difficult for a third party to acquire or make a bid for us. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. In addition, shares of our preferred stock may be issued in the future without further shareholder approval and upon such terms and conditions and having such rights, privileges and preferences, as the board of directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of any holders of preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock. We have no present plans to issue any additional shares of preferred stock. In addition, we have adopted a shareholder rights plan that, along with certain provisions of our Restated Articles of Incorporation, may have the effect of discouraging certain transactions involving a change of control of the company.

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     Interest Rate Market Risk

          We are exposed to market risk related to changes in interest rates that could adversely affect the value of our investments.  We maintain a short-term investment portfolio consisting of interest bearing securities with an average maturity of less than one year.  These securities are classified as “available-for-sale”.  These securities are interest bearing and thus subject to interest rate risk and will fall in value if market interest rates increase.  Because we have the ability to hold our fixed income investments until maturity, we do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates related to our securities portfolio.  The fair value of our securities available-for-sale at March 31, 2003 and December 31, 2002 was $98.8 million and $122.3 million, respectively.  For each one percent change in interest rates, the fair value of our securities available-for-sale would change by approximately $988,000 and $1.2 million as of March 31, 2003 and December 31, 2002, respectively.

          We may manage our interest rate market risk, when deemed appropriate, through the use of derivative financial instruments.  Derivative financial instruments are viewed as risk management tools and are not used for speculative or trading purposes.  In 2001, we entered into a long-term operating lease that had a variable rent component that was based on LIBOR.  In connection with this lease, we entered into an interest rate swap agreement to limit our interest rate exposure.  This swap agreement has been designated as a cash flow hedge.  The portion of the net gain or loss on the derivative instrument that is effective as a hedge is reported as a component of accumulated other comprehensive loss in shareholders’ equity.  As of March 31, 2003 and December 31, 2002, the fair value of the interest rate swap was a liability of $1.1 million.

     Foreign Exchange Market Risk

          We have operated primarily in the United States and revenues to date have been primarily in U.S. dollars.  Accordingly, we do not have material exposure to foreign currency rate fluctuations.  We have not entered into any foreign exchange contracts to hedge any exposure to foreign currency rate fluctuations because such exposure is immaterial.

          Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

          There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation.

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PART II.  OTHER INFORMATION

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James A. Bianco, certify that:

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CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Louis A. Bianco, certify that:

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