The goal of a phase II trial is to make a preliminary determination regarding the activity and tolerability of a new treatment and thus to determine whether the treatment warrants further study in the phase III setting. Phase II clinical trials are typically designed in the hypothesis testing framework with two possible outcomes, either reject the null hypothesis H(0) or reject the alternative hypothesis H(a), based on the observed activity level. However, in cases where the observed activity is "borderline," the decision regarding the future of the agent is not as clear as the prespecified hypothesis test would indicate. In this paper we propose an alternative design that allows for three outcomes: reject H(0), reject H(a), or reject neither. We describe the theoretical properties of this design and illustrate it with several examples. We focus on the clinical implications of the three-outcome design. Control Clin Trials 2001;22:117-125