You should read the following discussion together with our consolidated financial statements and related notes included elsewhere in this report. The results discussed below are not necessarily indicative of the results to be expected in any future periods. Our disclosure and analysis in this section of the report also contain forward-looking statements. When we use the words "anticipate," "estimate," "project," "intend," "expect," "plan," "believe," "should," "likely" and similar expressions, we are making forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. In particular, these statements include statements such as: our estimates about profitability; the percentage and amount of royalties we expect to earn on Dacogen sales under our agreement with Eisai; our forecasts regarding our operating expenses; and our statements regarding the sufficiency of our cash to meet our operating needs. Our actual results could differ materially from those predicted in the forward-looking statements as a result of risks and uncertainties including, but not limited to: our ability to successfully integrate Astex Therapeutics Limited with our existing business; the commercial success of Dacogen; delays and risks associated with conducting and managing our clinical trials; developing products and obtaining regulatory approval; our ability to exit research operations in Salt Lake City; our ability to establish and maintain collaborative relationships; competition; our ability to obtain funding; our ability to protect our intellectual property; our dependence on third party suppliers; risks associated with the hiring and loss of key personnel; adverse changes in the specific markets for our products; and our ability to launch and commercialize products. Certain unknown or immaterial risks and uncertainties can also affect our forward-looking statements. Consequently, no forward-looking statement can be guaranteed and you should not rely on these forward-looking statements. For a discussion of the known and material risks that could affect our actual results, please see the "Risk Factors" section of this report. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Readers should carefully review the Risk Factors section as well as other reports or documents we file from time to time with the Securities and Exchange Commission.

Overview

We are a pharmaceutical company dedicated primarily to the discovery and development of novel small molecule therapeutics with a focus on oncology and hematology. We believe we are developing a proprietary pipeline of novel medicines for partnership with leading pharmaceutical companies. We believe we are a leader in the application of fragment-based drug discovery and development of small-molecule therapeutics. Fragment-based drug discovery is considered by many in our sector to be one of the most important advances in discovery chemistry in the last 20 years.

On July 20, 2011, we completed the acquisition of all of the outstanding shares of Astex Therapeutics Limited ("ATL"), a privately held UK-based biotechnology company with particular expertise in fragment-based drug discovery. We agreed to pay deferred consideration of $30 million in stock, cash, or a combination of stock and cash, to be determined at the discretion of the Company, no later than 30 months after the closing of the acquisition (January 2014), and made the first payment of $10 million in cash in February 2012.

ATL discovers and develops novel small molecule therapeutics. Using its fragment-based drug discovery platform, Pyramid, ATL has built a pipeline of molecularly-targeted drugs for large pharmaceutical partners and internal development that are at various stages of clinical, pre-clinical and early discovery development.

Our founding strategy was to in-license late-stage clinical products and commercialize these products by executing selective developmental and commercialization strategies that might allow these products to come into the market and be utilized by the widest possible patient populations. However, the competition for late-stage compounds that can be obtained through licensure or acquisition, that have shown initial efficacy in humans, has increased significantly with most major pharmaceutical

companies and emerging biotechnology companies taking positions in this market. We believe that our current strategy attempts to mitigate the competitive risk of in-licensure and positions us to out-license selective products to our licensing competitors or other pharmaceutical companies. Our primary objective is to become a leading developer and seller or licensor of medicines for patients suffering from cancer.

We currently receive development and license revenue from partnered programs and royalty revenues relating to sales of DacogenŽ (decitabine) for Injection, a product approved by the FDA for the treatment of patients with MDS, which is licensed to Eisai Corporation. We are entitled to receive a royalty on worldwide net sales of Dacogen starting at 20% and escalating to a maximum of 30%. We recognize royalty revenue when the royalty statement is received from Eisai because we do not have sufficient ability to accurately estimate Dacogen sales prior to that time. In 2006, Eisai executed an agreement to sublicense Dacogen to Cilag Gmbh International ("Cilag"), a Johnson & Johnson company, granting exclusive development and commercialization rights in all territories outside North America. Cilag is responsible for conducting regulatory and commercial activities related to Dacogen in all territories outside North America, while Eisai retains all commercialization rights and responsibility for all activities in the United States, Canada and Mexico. As a result of both the original agreement with Eisai and the sublicense with Cilag, we may receive up to $17.5 million in future contingent payments dependent upon achievements for Dacogen globally. In the second half of 2012, the Company will learn the outcome of Cilag's submission to the European Medicines Agency ("EMA"), seeking approval for Dacogen in the elderly Acute Myeloid Leukemia ("AML") indication, which could result in receipt of $7.5 million of the contingent payments from Eisai.

All of our current products, other than Dacogen, are in the development or clinical trial stage, and will require substantial additional investments in research and development, clinical trials, regulatory and sales and marketing activities to commercialize these product candidates. Conducting clinical trials is a lengthy, time-consuming, and expensive process involving inherent uncertainties and risks, and our studies may be insufficient to demonstrate safety and efficacy to support FDA approval of any of our product candidates.

As a result of our substantial research and development expenditures and minimal product revenues, we have incurred cumulative losses of $330.5 million through March 31, 2012, and have not consistently generated enough funds through our operations to support our business. Although we were profitable in the years ended December 31, 2011 and 2010, as a result of our acquisition of ATL we expect to have operating losses over the next few years and we may never achieve sustained profitability.

Ultimately, our ability to sustain profitability will depend upon a variety of factors, including regulatory approvals of our products, the timing of the introduction and market acceptance of our products and competing products, Eisai's success in selling Dacogen, the success of our various collaborative, research and license arrangements, the launch of new products and our ability to control our ongoing costs and operating expenses. If our drug discovery and research efforts are not successful, or if the results from our clinical trials are not positive, we may not be able to get sufficient funding to continue our trials or conduct new trials, and we would be forced to scale down or cease our business operations. Moreover, if our products are not approved or commercially accepted we will remain unprofitable for longer than we currently anticipate. Additionally, we might be forced to substantially scale down our operations or sell certain of our assets, and it is likely the price of our stock would decline precipitously.

Critical Accounting Policies

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

with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and reported disclosures. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, valuation of investments and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are more fully disclosed in Note 1 to our consolidated financial statements included in our 2011 Annual Report on Form 10-K. However, some of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

We account for stock-based compensation at the fair value estimated on the measurement date using the Black-Scholes option-pricing model based on assumptions for volatility, risk-free interest rates, expected life of the option, and dividends (if any). Expected volatility is determined based on a blend of historical volatility and implied volatility of our common stock based on the period of time corresponding to the expected life of the stock options. The expected life of our stock options is based on our historical data and represents the period of time that stock options granted are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption.

We are using the straight-line attribution method to recognize stock-based compensation expense. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest, including awards that vest based on certain performance criteria. We estimate forfeitures at the time of grant and revise them, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term "forfeitures" is distinct from "cancellations" or "expirations" and represents only the unvested portion of the surrendered option. This analysis is re-evaluated quarterly and the forfeiture rate is adjusted as necessary based upon historical data. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

As of March 31, 2012, there was $4.2 million of total unrecognized compensation cost related to unvested stock-based awards that vest based upon service conditions or vest based upon performance conditions and are probable of vesting. This cost is expected to be recognized over a weighted average period of 2.62 years.

Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. During the three month period ended March 31, 2012, we recorded royalty revenue of $20.6 million. Because we do not have sufficient ability to accurately estimate Dacogen sales, we recognize royalty revenue when we receive the royalty statement from Eisai. In accordance with our license agreement with Eisai, we are entitled to receive 50% of any payments Eisai receives as a result of any sublicenses.

In January 2012, we entered into an Asset Transfer Agreement with GSK. Under the terms of the Transfer Agreement, we terminated our license agreement and transferred certain existing research work and assets generated under the epigenetic collaboration and grant licensing rights to GSK. We

have no further obligation to conduct additional research work on the program. GSK will make one-time, non-refundable payments to us upon the achievement of the first transferred licensed compound to reach defined milestones as described in the Transfer Agreement and will also pay us royalties upon certain sales from the transferred assets, if any. We recognized the remaining balance of deferred revenue of $1,430,000 at December 31, 2011 related to this agreement as development and license revenue in the quarter ended March 31, 2012.

Revenues associated with substantive, at-risk milestones pursuant to ATL's collaborative agreements will be recognized upon achievement of the milestones through option exercise by the collaboration partner. We consider a milestone to be substantive at the inception of the arrangement if it is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item as a result of a specific outcome resulting from our performance to achieve the milestone, it relates solely to past performance, and it is reasonable relative to all of the deliverables and payment terms within the arrangement. Non-refundable contingent future amounts receivable in connection with future events specified in the collaboration agreement that are not considered milestones will be recognized as revenue when payments are earned from our collaborators through completion of any underlying performance obligations, the amounts are fixed or determinable, and collectibility is reasonably assured.

The fair value of the identified intangible assets recorded in the acquisition of ATL was estimated by using income or cost replacement approaches. The acquisition of ATL also created goodwill as the purchase price exceeded the fair value of the identifiable assets acquired net of the liabilities assumed. The value assigned to developed technology is being amortized over seven years and the value assigned to the non-active collaboration agreements is being amortized over five years, the estimated useful lives of the assets. The in-process research and development and trademark intangibles, as well as the goodwill, are deemed to have indefinite lives. These assets will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present).

In December 2011, we performed an annual goodwill impairment test. During the last quarter of 2011 and in 2012 through the filing date of these financial statements, there has been significant fluctuation in the quoted market prices of our common stock. Significant judgment is required to evaluate the fair value of the Company. We concluded, based on the changes in the market prices of the Company's common stock during this period and our assessment of the premium a market participant would be willing to pay to acquire control of the Company, that goodwill was not impaired, as the fair value of the Company as a whole exceeded the carrying value of its net assets. Such excess was relatively insignificant and consequently, we will continue to monitor the Company's market capitalization and other events and circumstances affecting its fair value, and will evaluate our goodwill for potential impairment in future periods. Should we conclude in a future period that the fair value of the Company as a whole is less than the carrying value of its net assets, it is likely that we will record a material charge for goodwill impairment, which could be as high as the entire goodwill amount.

Investments in financial instruments are carried at fair value based on quoted market prices, with unrealized gains and losses included in accumulated other comprehensive income or loss in stockholders' equity. Our investment portfolio includes equity securities that could subject us to material equity market risk and corporate and U.S. government (or U.S. governmental agency) obligations that subject us to varying levels of credit risk. An other than temporary decline in fair value of a financial instrument will be subject to a write-down resulting in a charge against earnings. The determination of whether a decline in fair value is other than temporary requires significant judgment, and could have a material impact on our balance sheet and results of operations. Our management

reviews the securities within our portfolio for other than temporary declines in value on a regular basis. As of March 31, 2012, the gross unrealized losses on available for sale debt securities was approximately $5,000, and such losses were not attributed to changes in credit risk. The prices of some of our marketable equity securities are subject to considerable volatility. Currently we own 2,384,211 shares of AVI Bio Pharma, Inc. ("AVI") and recorded an other-than-temporary decline in value of $3.1 million related to this investment during the year ended December 31, 2008. As of March 31, 2012, the fair value of our investment in AVI was greater than our adjusted cost basis. However, decreases in the fair value of our securities may significantly impact our results of operations.

Investments in equity securities without readily determinable fair value are carried at cost. We periodically review those carried costs, amounting to $500,000 as of March 31, 2012, and evaluate whether an impairment has occurred. The determination of whether an impairment has occurred requires significant judgment, as each investment has unique market and development opportunities.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04 relating to fair value measurements. This guidance clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The amendment is effective for interim and annual periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012. The adoption of this amendment did not have a material impact on our results of operations, cash flows, or financial position.

In June 2011, the FASB issued ASU 2011-05 on the presentation of comprehensive income, which amends current comprehensive income guidance. This amendment requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amended guidance, which must be applied retroactively, is effective for interim and annual periods beginning after December 15, 2011. We adopted this ASU on January 1, 2012. The adoption of the provisions of this guidance did not have a material impact on our results of operations, cash flows, and financial position.

In September 2011, the FASB issued ASU 2011-08 on testing goodwill for impairment. Under the amendment, an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized, if any. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the provisions of this guidance is not expected to have a material impact on our results of operations, cash flows, and financial position.

Results of Operations

Three months ended March 31, 2012 compared to three months ended March 31, 2011:

    The results for the three months ended March 31, 2012 include the
consolidated results of ATL since the acquisition date of July 20, 2011.

                                           Three months ended
                                               March 31,                Change
       Revenues                             2012         2011     Dollar    Percent
                                              (Dollars in thousands)
       Royalty revenue                    $   20,594   $ 16,971   $ 3,623      21.35 %
       Development and license revenue         1,430        127     1,303      1,026

The increase in royalty revenue from 2011 to 2012 is due to higher Dacogen product sales by Eisai. Eisai is required to pay us royalties starting at 20% and escalating to a maximum of 30% of net worldwide Dacogen sales within 45 days after the end of each calendar quarter. Because we do not have sufficient ability to accurately estimate Dacogen sales, we recognize royalty revenue when we receive the royalty statements from Eisai. Therefore, royalty revenues recognized in the first quarters of 2011 and 2012 relate to worldwide Dacogen sales for the fourth quarters of 2010 and 2011, respectively.

Development and license revenue in 2011 related to the recognition of upfront payments received in connection with collaboration agreements with GSK. The upfront payment received was being recognized ratably over five years. In January 2012, we terminated our license agreement and transferred certain existing research work and assets generated under the epigenetic collaboration and grant licensing rights to GSK. We recognized the remaining balance of deferred revenue of $1,430,000 related to this agreement as development and license revenue in the quarter ended March 31, 2012.

                                         Three months ended
                                             March 31,                Change
         Operating expenses               2012         2011     Dollar    Percent
                                            (Dollars in thousands)
         Research and development       $   14,065    $ 7,992   $ 6,073      75.99 %
         General and administrative          4,342      3,621       721      19.91
         Amortization of intangibles         2,157          -     2,157          -

Operating results for the three months ended March 31, 2012 include the expenses related to ATL, our UK based subsidiary which was acquired on July 20, 2011. The increase in research and development expenses was primarily due to higher drug discovery, product development, and clinical trial programs costs associated with SGI-110, AT13387 and amuvatinib. We expect that research and development expenses for 2012 will continue to increase over the prior year reflecting the operational impact of the acquisition of ATL and increased clinical trial activity related to our various clinical trial programs.

The increase in general and administrative expenses from 2011 to 2012 relates primarily to increased salaries and benefits, rent, and facility costs related costs at our UK based subsidiary acquired in July 2011.

Amortization of intangibles relates to the intangible assets that were part of the acquisition of ATL in July 2011. Definite-lived intangible assets are being amortized over their estimated useful lives. The

value assigned to developed technology is being amortized over seven years and the value assigned to the non-active collaboration agreements is being amortized over five years.

                                     Three months ended March 31,            Change
 Other income (expense)                 2012                2011        Dollar    Percent
                                             (Dollars in thousands)
 Interest income                    $            41       $       49   $     (8 )    16.33 %
 Other income (expenses)                        (44 )              -         44          -
 Income tax benefit (provision)               2,783              (44 )   (2,827 )    6,425

The decline in interest income was due primarily to slightly lower cash and marketable securities balances for the three months ended March 31, 2012 compared to the comparable period in 2011.

Other income (expenses) for the three months ended March 31, 2012 includes foreign currency transaction losses of $4,000 and $40,000 relating to the write-down of one of our marketable securities due to an other than temporary decline in value.

The 2012 income tax benefit primarily includes a foreign refundable UK research and development tax credit related to ATL and the recognition of a tax benefit associated with the amortization of deferred tax liabilities resulting from the acquisition of ATL on July 20, 2011. The 2011 tax provision was based on the Company's estimated effective tax rate for the year, taking into account the available net operating loss carryforwards and estimated research and development tax credits.

Liquidity and Capital Resources

Our cash, cash equivalents, and marketable securities totaled $126.2 million at March 31, 2012 compared to $128.1 million at December 31, 2011.

Net cash provided by operating activities was $6,386,000 for the three months March 31, 2012, and consisted primarily of the net income of $4,240,000 plus amortization of intangibles of $2,157,000, depreciation of $444,000, stock-based compensation expense of $765,000, and decrease in accounts receivable of $4,763,000, partially offset by the increase in income tax receivable of $1,329,000, decrease in accounts payable and other liabilities of $1,988,000, decrease in deferred tax liability of $1,484,000, and a decrease in deferred revenue of $1,430,000. Net cash provided by operating activities was $10,049,000 for the three months March 31, 2011, and consisted primarily of the net income of $5,490,000 plus stock-based compensation expense of $711,000, depreciation of $286,000, an increase in accounts payable and other liabilities of $1,614,000, and the release of our restricted cash of $2,134,000 due to the expiration of the underlying lease term and related collateral requirement.

Net cash used in investing activities was $11,986,000 for the three months ended March 31, 2012 and consisted of $63,510,000 for purchases of marketable securities, $10,012,000 for the deferred consideration payment relating to the acquisition of ATL, and $668,000 for purchases of property and equipment, offset . . .