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<HEAD>
<TITLE>FORM S-1</TITLE>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>As filed with the Securities and Exchange Commission on
March&nbsp;14, 2005.</B>
</DIV>

<DIV align="right" style="font-size: 10pt;">
<B>Registration
No.&nbsp;333-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B>
</DIV>

<DIV align="center" style="font-size: 6pt;">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 3pt;">
<DIV style="width: 100%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 4pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

<DIV align="center" style="font-size: 12pt;">
<B>Washington,&nbsp;D.C. 20549</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 18pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Form S-1</B>
</DIV>

<DIV align="center" style="font-size: 12pt;">
<B>REGISTRATION STATEMENT</B>
</DIV>

<DIV align="center" style="font-size: 12pt;">
<B>UNDER</B>
</DIV>

<DIV align="center" style="font-size: 12pt;">
<B>THE SECURITIES ACT OF 1933</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 24pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 8pt;">
<I>(Exact name of registrant as specified in its charter)</I>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 9pt; ">

<TR style="font-size: 1pt;">
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="29%">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B>Delaware</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>2834</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>13-4119931</B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <I>(State or other jurisdiction of<BR>
    incorporation or organization)</I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <I>(Primary Standard Industrial<BR>
    Classification Code Number)</I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <I>(I.R.S. Employer<BR>
    Identification Number)</I></TD>
</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>8 Clarke Drive</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Cranbury, New Jersey 08512</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(609)&nbsp;409-9010</B>
</DIV>

<DIV align="center" style="font-size: 8pt;">
<I>(Address, including zip code, and telephone number, including
area code, of registrant&#146;s principal executive offices)</I>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>David S. Tierney, M.D.</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>President and Chief Executive Officer</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Valera Pharmaceuticals, Inc.</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>8 Clarke Drive</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Cranbury, New Jersey 08512</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(609)&nbsp;409-9010</B>
</DIV>

<DIV align="center" style="font-size: 8pt;">
<I>(Name, address, including zip code, and telephone number,
including area code, of agent for service)</I>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B><I>With copies to:</I></B>
</DIV>

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<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B>Robert B. Murphy, Esq.<BR>
    Raymond A. Miller, Esq.<BR>
    Pepper Hamilton LLP<BR>
    600 Fourteenth Street, N.W.<BR>
    Washington,&nbsp;D.C. 20005-2004<BR>
    (202)&nbsp;220-1200<BR>
    Facsimile: (202)&nbsp;220-1665</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>Richard B. Aftanas,&nbsp;Esq.<BR>
    Skadden, Arps, Slate, Meagher&nbsp;&#38; Flom LLP<BR>
    Four Times Square<BR>
    New York, NY 10036<BR>
    (212)&nbsp;735-3000<BR>
    Facsimile: (212)&nbsp;735-2000</B></TD>
</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 9pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;
<B>Approximate date of commencement of proposed sale to the
public:</B> As soon as practicable after this Registration
Statement is declared effective.
</DIV>

<DIV align="left" style="font-size: 9pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule&nbsp;415 under the Securities Act of 1933, check the
following
box:&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 9pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;
If this Form is filed to register additional securities for an
offering pursuant to Rule&nbsp;462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 9pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;
If this Form is a post-effective amendment filed pursuant to
Rule&nbsp;462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 9pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;
If this Form is a post-effective amendment filed pursuant to
Rule&nbsp;462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 9pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;
If delivery of the prospectus is expected to be made pursuant to
Rule&nbsp;434, please check the following
box.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>CALCULATION OF REGISTRATION FEE</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="44%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
    <TD width="2%">&nbsp;</TD>
    <TD width="22%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
    <TD width="2%">&nbsp;</TD>
    <TD width="24%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Proposed Maximum</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Amount of</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Title of Each Class of Securities to be Registered</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Aggregate Offering Price(1)</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Registration Fee</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common Stock, par value $.001</DIV>
    </TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $74,750,000</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $8,798.08</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 9pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Estimated solely for the purpose of calculating the amount of
    the registration fee pursuant to Rule&nbsp;457(o) under the
    Securities Act of 1933, as amended.</TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 9pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;
<B>The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section&nbsp;8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to said Section&nbsp;8(a), may determine.</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 8pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 4pt;">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<TABLE width="100%" cellpadding="5" style="border: 3pt double #000000; margin-bottom: 6pt; font-size: 10pt"><TR><TD>
<B><FONT style="font-size: 9pt" color="#E8112D">The information
in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and we
are not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not
permitted.</FONT><FONT style="font-size: 9pt"> <BR>

</FONT></B>
</TD></TR></TABLE>

<DIV style="margin-top: 1pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="50%"></TD>
    <TD width="50%"></TD>
</TR>

<TR valign="top">
    <TD align="left"><B>PRELIMINARY PROSPECTUS</B></TD>
    <TD align="right"><B><FONT color="#E8112D">SUBJECT TO COMPLETION, DATED MARCH&nbsp;14, 2005</FONT></B></TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 10pt; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<IMG src="y06541y0654100.gif" alt="(VALERA PHARMACEUTICALS, INC. LOGO)">
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shares
of Common Stock</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 21pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 35%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 33pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This is the initial public offering of our common stock. We are
selling &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock. The public offering price of our common stock
is expected to be between
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to this offering, there has been no public market for our
common stock. We have applied to have our common stock approved
for quotation on The Nasdaq National Market under the symbol,
&#147;VLRX.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>Investing in our common stock involves a high degree of risk.
Before buying any shares, you should carefully read the
discussion of material risks of investing in our common stock
under the heading &#147;Risk Factors&#148; beginning on
page&nbsp;7.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="71%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Per Share</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Public Offering Price</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Underwriting Discounts and Commissions</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds, Before Expenses, to Us</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters may also purchase up to an
additional &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
from us at the public offering price, less the underwriting
discounts and commissions, within 30&nbsp;days from the date of
this prospectus to cover over-allotments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters are offering the shares of our common stock as
described in &#147;Underwriting.&#148; Delivery of the shares
will be made on or
about &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005.
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 21pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 35%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 21pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 14pt;">

<TR>
    <TD width="50%"></TD>
    <TD width="50%"></TD>
</TR>

<TR valign="top">
    <TD align="left"><B> UBS Investment Bank</B></TD>
    <TD align="right"><B>Banc of America Securities LLC</B></TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 3pt; margin-top: 21pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 35%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 21pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 14pt;">

<TR>
    <TD width="50%"></TD>
    <TD width="50%"></TD>
</TR>

<TR valign="top">
    <TD align="left"><B>First Albany Capital</B></TD>
    <TD align="right"><B>Fortis Securities LLC</B></TD>
</TR>

</TABLE>

<!-- PAGEBREAK -->
<P><HR noshade><P>

<DIV align="left" style="font-size: 10pt;">

</DIV>

<DIV align="left" style="font-size: 10pt;">
<!-- TOC -->
</DIV>

<DIV align="left" style="font-size: 10pt;">
<A name="tocpage"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>TABLE OF CONTENTS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; ">

<TR style="font-size: 1pt;">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Page</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#101'>Prospectus summary</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#102'>Risk factors</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#103'>Forward-looking statements</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#104'>Use of proceeds</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#105'>Dividend policy</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#106'>Capitalization</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#107'>Dilution</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#108'>Selected historical financial data</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#109'>Management&#146;s discussion and analysis
    of financial condition and results of operations</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#110'>Business</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#111'>Management</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>55</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#112'>Principal stockholders</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#113'>Certain relationships and related
    transactions</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>66</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#114'>Description of our securities</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>67</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#115'>Shares eligible for future sale</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#116'>Underwriting</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#117'>Legal matters</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#118'>Experts</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#119'>Available information</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#120'>Index to financial statements</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>76</TD>
    <TD>&nbsp;</TD>
</TR>

<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv3w1.txt">AMENDED AND RESTATED CERTIFICATE OF INCORPORATION</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv3w3.txt">BYLAWS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv4w2.txt">SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv4w3.txt">FORM OF INCENTIVE STOCK AWARD AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv4w4.txt">FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w1.txt">EXECUTIVE EMPLOYMENT AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w5.txt">TERMINATION AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w6.txt">TERMINATION OF AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w7.txt">AMENDMENT TO THE TERMINATION OF THE JOINT DEVELOPMENT AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w8.txt">AMENDMENT NO. 2 TO TERMINATION AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w9.txt">LEASE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w10.txt">AMENDMENT TO LEASE</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w11.txt">LEASE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w12.txt">CONTRIBUTION AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w13.txt">LICENSE AND DISTRIBUTION AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w14.txt">2002 EQUITY INCENTIVE PLAN</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv10w17.txt">AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06541exv23w1.txt">CONSENT OF ERNST & YOUNG LLP</A></FONT></TD></TR>
</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt;">
<!-- /TOC -->
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
different information. The information contained in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any
sale of the shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&#147;Vantas&#148; is our registered trademark. Eligard&#174;,
Elmiron&#174;, Lupron&#174;, Lupron Depot-PED&#174;,
Sandostatin&#174;, Sandostatin LAR&#174;, Somavert&#174;,
Viadur&#174; and Zoladex&#174; are the registered trademarks of
others.
</DIV>

<P align="center" style="font-size: 10pt;">i

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10pt;">
<A name='101'></A>
</DIV>

<!-- link1 "PROSPECTUS SUMMARY" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>PROSPECTUS SUMMARY</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>This summary highlights selected information contained
elsewhere in this prospectus. You should read the entire
prospectus carefully, including the Risk Factors section
beginning on page&nbsp;7 and our financial statements and
related notes and schedule beginning on page F-1 before making
an investment decision. References to &#147;we,&#148;
&#147;us,&#148; &#147;our&#148; or &#147;Valera&#148; refers to
Valera Pharmaceuticals, Inc.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Company</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Valera is a fully-integrated specialty pharmaceutical company
concentrating on the development and commercialization of
products for the treatment of urological and endocrine
conditions, diseases and disorders. Our first product, Vantas,
was approved for commercial sale and distribution by the
U.S.&nbsp;Food and Drug Administration, or FDA, in October 2004.
Vantas is a 12-month implant for the palliative treatment of
advanced prostate cancer that delivers histrelin, a luteinizing
hormone-releasing hormone agonist, or LHRH agonist. Vantas is
the only product indicated for the palliative treatment of
prostate cancer that delivers histrelin, the most potent LHRH
agonist available on the market. In November 2004, our sales
force began marketing Vantas to the urologists in the United
States that account for the majority of LHRH agonist product
sales.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to Vantas, we are developing a pipeline of product
candidates that are based on our patented polymer technology, or
Hydron Technology, for indications that include central
precocious puberty, acromegaly, and opioid addiction. Hydron
Technology is our proprietary drug delivery technology that
forms the Vantas implant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Product Development</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes certain information regarding
Vantas and our product candidates.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="25%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="19%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Therapeutic</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Delivery</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Next Anticipated</B></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Product</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Indication</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Area</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Method</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Status</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Milestone</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    Vantas</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>Prostate Cancer</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Urology</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Implant</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Commercial Sales</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    European Regulatory Filing in First Half of 2005</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    VP002<BR>
    (Histrelin)</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">Central Precocious Puberty</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Endocrinology</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Implant</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Phase&nbsp;III</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    New Drug Application Filing in First Half of 2006</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    VP003<BR>
    (Octreotide)</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>Acromegaly</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Endocrinology</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Implant</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Phase&nbsp;I/II</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Phase&nbsp;IIb Clinical Trial in Second Half of 2005</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    VP004<BR>
    (Naltrexone)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>Addiction Disorders</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Central Nervous System</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Implant</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Pre-clinical</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Phase&nbsp;I/II Clinical Trial in First Half of 2006</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    VP005<BR>
    (Anti-inflammatory)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>Interstitial Cystitis</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Urology</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Bladder Instillation</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Pre-clinical</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Phase&nbsp;I/II Clinical Trial in First Half of 2006</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Vantas is a soft and flexible implant utilizing our Hydron
Technology to deliver histrelin over a 12-month period for the
palliative treatment of advanced prostate cancer. The total
number of patients with advanced prostate cancer in the
U.S.&nbsp;was approximately 652,000 in 2004, and we estimate the
patient population in Europe to be of similar size. Total
U.S.&nbsp;sales of LHRH agonist products for advanced prostate
cancer were approximately $974&nbsp;million in 2004 based on IMS
Health market data. We believe that Vantas is a more comfortable
and convenient alternative to competing products because it
eliminates the requirement of multiple physician visits and
repeated injections and is smaller, softer and more flexible
than other implants. We have been marketing Vantas in the
U.S.&nbsp;since November 2004, and we plan to file an
application for regulatory approval in the European Union in the
first half of 2005.
</DIV>

<P align="center" style="font-size: 10pt;">1

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
VP002 is an implant utilizing Hydron Technology to deliver
histrelin over a 12-month period for the treatment of central
precocious puberty, or CPP, which is the early onset of puberty
in young children. The prevalence of this condition is estimated
to be between one in 5,000 to 10,000 children. This yields a
potential population of up to 11,700 children who are 14 or
younger with this condition in the U.S.&nbsp;The only therapy
currently marketed to treat CPP is Lupron Depot-PED, which
consists of monthly intramuscular injections of leuprolide to
hormonally suppress these children. If approved, VP002 would
provide hormonal suppression with histrelin over a 12-month
period. We believe VP002 would have a competitive advantage over
existing products because it eliminates multiple injections in
children and offers increased convenience and reduced costs. We
are currently conducting a single Phase&nbsp;III clinical trial
for VP002 with 36&nbsp;patients and expect to file a new drug
application with the FDA in the first half of 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
VP003 is an implant utilizing Hydron Technology to deliver
octreotide over a six-month period for the treatment of
acromegaly, a chronic hormonal disorder that occurs when a
pituitary tumor produces excess growth hormone, or GH. We
believe that there are approximately 1,000 new acromegalic
patients per year in the U.S. and 16,000 total patients. We
estimate the U.S.&nbsp;acromegalic market to be
$160&nbsp;million annually, consisting primarily of monthly
injections of octreotide. Octreotide is used to substantially
reduce GH levels and insulin-like growth factor levels in
patients. We believe that there is a market for a longer-acting
octreotide formulation such as VP003 in order to reduce the
number of physician visits for injections. We believe patient
compliance would also be significantly improved by a
longer-acting treatment with VP003. We plan to initiate a
Phase&nbsp;IIb clinical trial in the second half of 2005 to
evaluate the efficacy of VP003 as compared to the monthly
formulation of Sandostatin.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have several other products in pre-clinical development,
including VP004, an implant using Hydron Technology to deliver
naltrexone for the treatment of addictive disorders, and VP005,
a solution instillation for the treatment of symptoms associated
with interstitial cystitis, a chronic inflammatory condition of
the bladder.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Drug Delivery System</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that implantable drug delivery systems may provide
safer and more effective administration of therapy by delivering
drugs directly to the bloodstream. Our implant is designed to
allow release of drugs continuously, at even, controlled rates
for up to a 12-month period. We believe that such predictable
release over 12&nbsp;months has not been achieved by most other
drug delivery systems. In addition, implants utilizing Hydron
Technology eliminate the requirement of multiple physician
visits and repeated injections and are smaller, softer and more
flexible than other implants. We believe that these
characteristics provide Vantas and our product candidates with
the advantages of reduced costs, better patient comfort and
increased patient compliance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Competitive Strengths</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that our key competitive strengths that distinguish
us from our competitors include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Technology.</I> Implants using Hydron Technology can be
    adapted to deliver many different drugs. In addition, these
    implants are soft and flexible, which enhances patient comfort.
    Further, because we own the manufacturing know-how to develop
    products utilizing Hydron Technology, we are able to control and
    maximize its potential commercial uses.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Development Capability.</I> As demonstrated by Vantas, we
    have the internal capability to efficiently develop a product
    and successfully take it through the regulatory process to
    market. We received FDA approval for Vantas within
    10&nbsp;months of submitting our new drug application. In
    addition, over the past three years, we have advanced two other
    product candidates into late-stage development.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Manufacturing Ability.</I> We manufacture Vantas and our
    product candidates utilizing Hydron Technology in a patented
    process, and because we control the manufacturing process, we
    can ensure high quality and fully realize any manufacturing cost
    efficiencies.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">2

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<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Sales and Marketing.</I> We have a highly focused sales force
    that call on the urologists that account for the majority of
    LHRH agonist product sales in the U.S. We plan to leverage our
    sales force to market to our current physician base and to
    physicians in additional specialty areas, such as endocrinology.
    We also believe that the direct physician distribution channel
    of Vantas may present a barrier to the future entry of
    competition from generic products as generic drug companies do
    not typically have field sales forces.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Business Strategy</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to growing sales of our approved product, Vantas,
our goal is to develop and commercialize products for the
treatment of urological and endocrine conditions, diseases and
disorders. To achieve this goal, our strategy includes the
following key elements:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Continue to Focus on Urological and Endocrine Conditions,
    Diseases and Disorders;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Develop Proprietary Pharmaceutical Portfolio;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Develop or Acquire New Drug Delivery Technologies;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Leverage Sales and Marketing Expertise; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Partner Outside the U.S.&nbsp;to Reach New Geographic Markets.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Corporate Information</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We were incorporated in the State of Delaware in 2000 as Hydro
Med Sciences, Inc. Prior to that time, we operated as a division
of GP Strategies Corporation. We changed our name from Hydro Med
Sciences, Inc. to Valera Pharmaceuticals, Inc. in July 2003. Our
principal executive offices are located at 8&nbsp;Clarke Drive,
Cranbury, New Jersey 08512, and our telephone number at that
address is (609)&nbsp;409-9010. Our website address is
http://www.valerapharma.com. Information contained in our
website is not a part of this prospectus.
</DIV>

<P align="center" style="font-size: 10pt;">3

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>The Offering</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt;">

<TR>
    <TD width="28%"></TD>
    <TD width="1%"></TD>
    <TD width="71%"></TD>
</TR>

<TR>
    <TD valign="top">
    Common Stock Offered</TD>
    <TD></TD>
    <TD valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    Common Stock Outstanding After the Offering</TD>
    <TD></TD>
    <TD valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    Use of Proceeds</TD>
    <TD></TD>
    <TD valign="top">
    We expect to use the net proceeds from this offering to expand
    our sales and marketing capabilities, fund our research and
    development activities, and expand our manufacturing
    capabilities and for general corporate purposes. In addition, we
    may use a portion of the net proceeds to acquire products or
    technologies that are complementary to our current or future
    business and product lines.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    Proposed Nasdaq Symbol</TD>
    <TD></TD>
    <TD valign="top">
    &#147;VLRX&#148;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    Risk Factors</TD>
    <TD></TD>
    <TD valign="top">
    You should read the &#147;Risk Factors&#148; section of this
    prospectus for a discussion of factors to consider before
    deciding to invest in our common stock.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The number of shares of our common stock outstanding after this
offering is based on 61,515,582&nbsp;shares outstanding as of
December&nbsp;31, 2004. Unless otherwise indicated, all
information in this prospectus assumes the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="3%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-for-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;reverse
    split of our common stock to be completed before the closing of
    this offering;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the conversion of 40,668,966 outstanding shares of our
    convertible preferred stock into 51,515,582&nbsp;shares of our
    common stock, which will become effective upon the closing of
    this offering;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the underwriters do not exercise their option to purchase up
    to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of our common stock to cover over-allotments.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The number of shares of our common stock to be outstanding
immediately after this offering excludes:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="3%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    6,716,550&nbsp;shares of our common stock issuable upon exercise
    of options outstanding as of December&nbsp;31, 2004, at a
    weighted average exercise price of $0.64 per share, of which
    options to purchase 2,004,888&nbsp;shares were exercisable as of
    that date;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    1,133,450&nbsp;shares of our common stock available for future
    grant under the Valera Pharmaceuticals, Inc. Equity Incentive
    Plan as of December&nbsp;31, 2004.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">4

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SUMMARY FINANCIAL DATA</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following tables set forth our summary financial data for
the three years ended December&nbsp;31, 2004 and as of
December&nbsp;31, 2004, which have been derived from our audited
financial statements included elsewhere in this prospectus. It
is important that you read this information together with
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations,&#148; &#147;Risk
Factors&#148; and our financial statements and the related notes
and schedule to these financial statements beginning on
page&nbsp;F-1 of this prospectus. The historical results
presented below are not necessarily indicative of results to be
expected in any future periods.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="53%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(Restated)<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net product sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>15,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>7,353</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,511,286</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Licensing revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>134,636</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total net revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,353</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,645,922</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating costs and expenses:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of product sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>608,150</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,319,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,229,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,375,819</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling and marketing</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>269,633</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>509,514</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,025,038</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    General and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,324,378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,838,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,897,435</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total operating expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,913,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,577,144</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,905,442</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,898,714</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,569,791</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,260,520</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest income (expense), net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,919</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,134</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,152</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss before income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,266,672</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Benefit for income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(243,618</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,023,054</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deemed
    dividend<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,139,535</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,860,465</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss attributable to common stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(8,696,192</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(17,883,519</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss attributable to common shareholders
    per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.59</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.87</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.79</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted average shares outstanding&nbsp;&#151; basic and diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unaudited pro forma basic and diluted net loss per
    share<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.40</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unaudited pro forma weighted average shares outstanding basic
    and diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44,206,980</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="52%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>As of December&nbsp;31, 2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Pro Forma</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Actual</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Pro Forma<SUP style="font-size: 85%; vertical-align: text-top">(3)</SUP></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>as Adjusted<SUP style="font-size: 85%; vertical-align: text-top">(4)</SUP></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance Sheet Data:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,052,643</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,052,643</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Working capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,306,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,306,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,323,193</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,323,193</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Long-term capital lease obligations and convertible preferred
    stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>39,942,188</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,193</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accumulated deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(38,317,116</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(38,317,116</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total stockholders&#146; (deficit) equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(29,886,559</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,038,436</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">5

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<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 15%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>(1)</TD>
    <TD align="left">
    We have determined that in connection with the issuance of our
    series&nbsp;B convertible preferred stock, certain anti-dilution
    provisions in our series&nbsp;A convertible preferred stock were
    activated. Because the shares of series&nbsp;B convertible
    preferred stock were sold at a price below the price that the
    shares of series&nbsp;A convertible preferred stock were sold,
    the conversion price and conversion ratio of the series&nbsp;A
    convertible preferred stock were adjusted in accordance with the
    original terms of that issuance when each tranche of
    series&nbsp;B convertible preferred stock was issued. These
    adjustments to the conversion price and the resulting conversion
    ratio resulted in deemed dividends being afforded to the holders
    of the series&nbsp;A convertible preferred stock. The total
    deemed dividend was not originally recorded in our 2003
    financial statements, but such statements have been restated to
    reflect this deemed dividend.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)</TD>
    <TD align="left">
    The pro forma net loss per share information is computed using
    the weighted average number of common shares outstanding, after
    giving pro forma effect to the automatic conversion of all
    outstanding shares of our convertible preferred stock into
    shares of common stock effective upon the completion of this
    offering, as if the conversion had occurred at the date of the
    original issuance.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)</TD>
    <TD align="left">
    The pro forma balance sheet information gives effect to the
    automatic conversion of all outstanding shares of our
    convertible preferred stock into an aggregate of
    51,515,582&nbsp;shares of common stock upon the completion of
    this offering.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(4)</TD>
    <TD align="left">
    The pro forma as adjusted balance sheet information gives
    further effect to the sale of shares of common stock in this
    offering at an assumed initial public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, which is the midpoint of the range set forth on the cover
    of this prospectus, after deducting underwriting discounts and
    commission and estimated offering expenses to be paid by us.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">6

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<DIV align="left" style="font-size: 10pt;">
<A name='102'></A>
</DIV>

<!-- link1 "RISK FACTORS" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>RISK FACTORS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>You should carefully consider the risk factors described
below and all other information contained in this prospectus,
including our historical financial statements and related notes
and schedule, before you decide to invest in our common stock.
If any of the following risk factors, as well as other risks and
uncertainties that are not currently known to us or that we
currently believe are not material, actually occur, our
business, financial condition and results of operations could be
materially and adversely affected. In that case, the trading
price of our common stock could decline, and you may lose part
or all of your investment.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Risks Related to Our Business</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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    <TD></TD>
    <TD>
    <B><I>We are largely dependent on the success of Vantas, our
    first product to be approved for commercial sale by the FDA, and
    we cannot be certain that we will be able to successfully
    commercialize Vantas.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have invested and will invest a significant portion of our
time and resources in the commercialization of Vantas, which was
approved for commercial use by the FDA in October&nbsp;2004. The
commercial success of Vantas is dependent on many factors,
including building a focused sales force, generating commercial
sales, gaining acceptance of Vantas by patients and the medical
community, and obtaining reimbursement from third party payors.
All of our product revenues to date have been generated solely
from sales of Vantas. Until our product candidates are approved
for commercial use, our only source of revenue will be
associated with Vantas sales. If we are unable to successfully
commercialize Vantas, we may be required to cease or reduce our
operations.
</DIV>

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    <TD width="3%"></TD>
    <TD width="97%"></TD>
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<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We have a history of operating losses and may not achieve
    profitability.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The extent of our future operating losses and timing of
profitability is highly uncertain, and we may never achieve
profitability. Our product development and clinical activities
will require significant continuing expenditures. Vantas is our
only product that has been approved for commercial use by the
FDA and that may generate any significant revenues. Since
inception we have incurred operating losses, and as of
December&nbsp;31, 2004, we had an accumulated deficit of
approximately $38.3&nbsp;million. We expect to incur additional
operating losses and capital expenditures and anticipate that
our expenses will increase in the foreseeable future as we
expand our sales of Vantas, continue our product development and
clinical research, acquire or in-license other pharmaceutical
products and expand our infrastructure.
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We have limited sales, marketing, and distribution
    experience and may be unable to successfully commercialize our
    products.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have limited experience in marketing, selling, and
distributing our products in the U.S. and abroad. To achieve
commercial success, we must build on our current marketing and
sales force or contract with other parties, including
collaborators, to perform these services for us. We may not be
able to negotiate favorable distribution or marketing
arrangements. To the extent that we enter into co-promotion or
other arrangements, any revenues we receive will depend upon the
efforts of third parties which may not be successful and are
only partially within our control. We will be competing with
companies that have experienced and well-funded marketing and
sales operations. The failure to adequately sell and distribute
Vantas or our product candidates, if approved, could have a
material adverse effect on our business, financial condition and
results of operations.
</DIV>

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    <TD width="3%"></TD>
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<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We are dependent on single suppliers for certain raw
    materials and services that are necessary for the manufacture of
    our Hydron implants. If any of these suppliers fail or are
    unable to perform in a timely and satisfactory manner, we may be
    unable to manufacture Vantas or some of our product candidates,
    which could delay the sale of Vantas and hinder research and
    development of our product candidates that use Hydron
    Technology.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We currently rely on single suppliers for certain raw materials
and services for the manufacture of our Hydron implants.
Although we have identified alternate sources of raw materials
and services, these raw materials and services may not be
immediately available to us. Further, even if raw materials are
immediately available, they must first meet our internal
specifications. Consequently, if any of our suppliers are unable
or unwilling to supply us with raw materials in sufficient
quantities with the correct specifications, or provide
</DIV>

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services on commercially acceptable terms, we may not be able to
manufacture Vantas or our product candidates in a timely manner
or at all, which could delay the production or sale of Vantas
and hinder the research and development of some of our product
candidates. Our inability to obtain raw materials and services
for the manufacture of our implants may force us to cease or
reduce operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We may not be able to obtain additional capital that may
    be necessary for growth and market penetration or to continue
    our operations.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may need to raise additional funds through public or private
debt or equity financings in order to fund our operations,
expand our sales and marketing capabilities, develop product
candidates, obtain FDA approval of our product candidates and
continue commercial development. Financings may be on terms that
are dilutive or potentially dilutive to our stockholders. Any
debt financing we enter into may involve incurring significant
interest expense and include covenants that restrict our
operations. If we raise additional funds through collaborations
and licensing arrangements, it may be necessary to relinquish
some rights to our technologies, product candidates or products,
or grant licenses on terms that are not favorable to us. Our
ability to raise additional funds will depend on financial,
economic and market conditions and other factors, many of which
are beyond our control. We may not be able to obtain financing
on terms acceptable to us or at all. If financing is
insufficient or unavailable, we will have to modify our growth
and marketing strategies and scale back operations by delaying,
reducing the scope of, or eliminating one or more of our planned
development, commercialization or expansion activities. This may
negatively affect our ability to commercialize Vantas and
develop and bring new products to market, which could have a
material adverse effect on our business, financial condition and
results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our future capital requirements may be significantly greater
than we expect and depend on many factors, including:
</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    costs associated with conducting pre-clinical and clinical
    testing;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    costs associated with commercializing Vantas and other products
    we may develop, including expanding sales and marketing
    functions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    costs of establishing arrangements for manufacturing;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    costs of acquiring new pharmaceutical products and drug delivery
    systems;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    payments required under our current and any future license
    agreements and collaborations;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    costs, timing and outcome of regulatory reviews;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    costs of obtaining, maintaining and defending patents on
    proprietary technology;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    costs of increased general and administrative expenses.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The successful commercialization of Vantas and any other
    products we develop will depend on obtaining coverage and
    reimbursement for patient use of these products from third party
    payors and Medicare/Medicaid.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Sales of pharmaceutical products largely depend on the
reimbursement of patients&#146; medical expenses by government
healthcare programs and private health insurers. These third
party payors control healthcare costs by limiting both coverage
and the level of reimbursement for healthcare products. Third
party payors are increasingly challenging the price and
examining the cost effectiveness of medical products and
services. The levels at which government authorities and third
party payors reimburse patients for the price they pay for
Vantas and other products we may develop could affect the extent
to which we are able to commercialize these products. Our
current sales of Vantas may be supported, in part, by favorable
reimbursement rates, which we expect will decrease in the second
half of 2005. In addition, significant uncertainty generally
exists as to the reimbursement status of newly approved
healthcare products. Our ability to achieve acceptable levels of
reimbursement of product candidates will affect our ability to
successfully commercialize, and attract collaborative partners
to invest in the development of our product candidates. Vantas
is currently eligible for
</DIV>

<P align="center" style="font-size: 10pt;">8

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<DIV align="left" style="font-size: 10pt;">
insurance reimbursement coverage. Reimbursement may not be
available for any other products that we develop and
reimbursement or coverage levels may reduce the demand for, or
the price of, Vantas or any other products that we may develop.
If we cannot maintain coverage for Vantas and obtain adequate
reimbursement for other products we develop, the market for
those products may be limited.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In both the U.S. and certain foreign jurisdictions, there have
been a number of legislative and regulatory proposals in recent
years to change the healthcare system in ways that could impact
our ability to profitably sell Vantas and any other products
that we develop. These proposals include prescription drug
benefit proposals for Medicare beneficiaries and measures that
would limit or prohibit payments for certain medical treatments
or subject the pricing of drugs to government control.
Legislation creating a prescription drug benefit and making
certain changes in Medicaid reimbursement has recently been
enacted by Congress and signed by the President. Additionally,
Medicare regulations implementing the prescription drug benefit
have recently been published. These and other regulatory and
legislative changes or proposals may affect our ability to raise
capital, obtain additional collaborators and market Vantas and
any other products that we may develop. In addition, in many
foreign countries, particularly the countries of the European
Union, the pricing of prescription drugs is subject to
government control. If our products are or become subject to
government regulation that limits or prohibits payment for our
products, or that subject the price of our products to
governmental control, our ability to sell Vantas and other
products we develop in commercially acceptable quantities at
profitable prices may be harmed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
products utilizing our technology fail to gain market
acceptance, we may be unable to generate significant
revenue.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Even if clinical trials demonstrate the safety and efficacy of
products developed utilizing our technology and all regulatory
approvals are obtained, such products may not gain market
acceptance among physicians, patients, third party payors or the
medical community. The current method of administration for our
product candidates in late-stage development is implantation,
which is generally less well received by patients than injection
therapy. The degree of market acceptance of any product
employing our technology will depend on a number of factors,
including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    establishment and demonstration of clinical efficacy and safety;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    cost-effectiveness;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    adequate reimbursement by third parties;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    relative convenience and ease of administration;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    timing of market introduction of competitive products;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    alternative treatment methods;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    marketing and distribution support.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If our products do not achieve significant market acceptance, we
may be unable to generate significant revenue, which could have
a material adverse effect on our business, financial condition
and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our failure to recruit, retain, and motivate qualified
    management and scientific personnel could adversely affect
    us.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our success depends, in part, on our continued ability to
attract, retain and motivate highly qualified management,
scientific and clinical and sales and marketing personnel. We
are substantially dependent on our senior management and key
scientific and technical personnel, particularly David S.
Tierney,&nbsp;M.D., Matthew L. Rue,&nbsp;III, Pete J. Perron and
Petr F. Kuzma, each of whose services are critical to the
successful implementation of our development, regulatory
strategies and commercialization. We will need to expand our
employee base as we continue to commercialize Vantas and develop
our product candidates. The loss of the services of any member
of our senior management, scientific or technical staff may
significantly delay or
</DIV>

<P align="center" style="font-size: 10pt;">9

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<DIV align="left" style="font-size: 10pt;">
prevent the achievement of drug development and other business
objectives, and could have a material adverse effect on our
business, operating results and financial condition. We may not
be able to recruit and retain qualified personnel in the future
due to intense competition for personnel among pharmaceutical
businesses, and our failure to do so could delay or curtail our
product development efforts, impair our ability to execute our
business strategy and adversely affect us. We also rely on
consultants and advisors to assist us with research and
development. All of our consultants and advisors are either
self-employed or employed by other organizations, and they may
have conflicts of interest or other commitments, such as
consulting or advisory contracts with other organizations, that
may affect their ability to contribute to us, which could have a
material adverse effect on our business, financial condition and
results of operations.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>We face substantial competition and our competitors may
    discover, develop or commercialize products similar to ours
    before or more successfully than us.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The biotechnology and pharmaceutical industries are very
competitive. In particular, competition for the development and
marketing of urological and endocrine pharmaceutical products is
intense and is expected to increase. Many of our competitors
have substantially greater financial and other resources, larger
research and development staffs and more experience developing
products, obtaining FDA and other regulatory approval and
manufacturing and marketing products. We compete against all
pharmaceutical companies that manufacture or market LHRH agonist
products. In addition, we compete against biotechnology
companies, universities, government agencies, and other research
institutions in the development of urological and endocrine
products, technologies and processes that are, or in the future
may be, the basis for competitive commercial products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In particular, we compete against the following LHRH agonist
products for the palliative treatment of advanced prostate
cancer: TAP Pharmaceutical Products&#146; Lupron and
Sanofi-Aventis&#146; Eligard, both multiple injection
formulations that deliver leuprolide; AstraZeneca&#146;s
Zoladex, a biodegradable rod that delivers goserelin for up to
three months; and Bayer Pharmaceuticals&#146; Viadur, a rigid
metal implant that releases leuprolide over a 12-month period.
With respect to our endocrine pharmaceuticals in late-stage
development for the treatment of central precocious puberty and
acromegaly, our competitors currently include TAP Pharmaceutical
Products&#146; Lupron Depot-PED, Novartis&#146; Sandostatin
injections and Sandostatin LAR Depots and Pfizer&#146;s Somavert.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our competitors may discover, develop or commercialize products
similar to ours before or more successfully than us and may
compete with us in establishing clinical trial sites and patient
registration for clinical trials, as well as in acquiring
technologies and technology licenses complementary to our
programs or advantageous to our business. In addition, there may
be product candidates of which we are not aware at an earlier
stage of development that may compete with our product
candidates. If any of them are successfully developed and
approved, they could compete directly with our product
candidates. This could result in reduced sales and pricing
pressure on any similar products that we develop, which in turn
would reduce our ability to generate revenue and could have a
material adverse effect on our business, financial condition and
results of operations.
</DIV>

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    <TD width="3%"></TD>
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    <TD></TD>
    <TD>
    <B><I>Our sales of Vantas and any other products we may develop
    could suffer from competition by generic products.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Although we have proprietary protection for Vantas and other
products we are developing, we could face competition from
generic substitutes of these products if generics are developed
by other companies and approved by the FDA. Because generic
manufacturers are not exposed to development risks for such
generic substitutes, these manufacturers can capture market
share by selling generic products at lower prices, which can
reduce the market share held by the original product.
Competition from the sale of generic products may cause a
decrease in revenue, and could have a material adverse effect on
our business, financial condition and results of operations.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>We may encounter difficulties managing our growth, which
    could adversely affect our results of operations.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with our commercial launch of Vantas, we may
experience rapid and significant growth in the number of our
employees and the scope of our operations. We currently have
approximately 40 employees devoted to sales and marketing, and
we expect to hire approximately 10 additional employees in this
area. Our future financial performance and our ability to
commercialize Vantas and any other products that we develop and
to compete effectively will depend, in part, on our ability to
manage any future growth effectively. This growth and expansion
is expected to place a significant demand on our financial,
managerial and operational resources.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our success in managing our growth will also depend on the
ability of our executive officers and senior management to
continue to implement and improve our operational, management
information and financial control systems and to expand, train
and manage our employee base. Our inability to manage growth
effectively could cause our operating costs to grow at a faster
pace than is currently anticipated and could have a material
adverse effect on our business, financial condition and results
of operations.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>We face a risk of product liability claims and may not be
    able to obtain adequate insurance.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our business exposes us to potential liability risks that may
arise from the clinical testing of our product candidates and
the manufacture and sale of Vantas and other products that we
may develop. Plaintiffs have received substantial damage awards
in some jurisdictions against pharmaceutical companies based
upon claims for injuries allegedly caused by the use of their
products. Such liability claims may be expensive to defend and
may result in large judgments against us. Although we have
liability insurance with a coverage limit of $10&nbsp;million,
our insurance may not reimburse us, or this coverage may not be
sufficient to cover claims that may be made against us. In
addition, if we are no longer able to maintain this coverage or
have to obtain additional coverage, we may not be able to obtain
liability insurance on acceptable terms or at all. Whether or
not we are ultimately successful in any product liability
litigation, such litigation could consume substantial amounts of
our financial and managerial resources and could result in:
</DIV>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    significant awards against us;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    substantial litigation costs;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    recall of the product;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    injury to our reputation;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    withdrawal of clinical trial participants;</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
all of which could have a material adverse effect on our
business, financial condition and results of operations.
</DIV>

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    <TD width="3%"></TD>
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    <TD></TD>
    <TD>
    <B><I>Because we have operated as a private company, we have no
    experience attempting to comply with public company obligations,
    including recently enacted changes in securities laws and
    regulations; attempting to comply with these requirements will
    increase our costs and require additional management resources
    and we still may fail to comply.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are a small company with limited resources. We have operated
as a private company, not subject to many of the requirements
applicable to public companies. The number and qualifications of
our finance and accounting staff are consistent with those of a
private company. While we plan to expand our staff if we become
public, we may encounter substantial difficulty attracting
qualified staff with requisite experience due to the high level
of competition for experienced financial professionals.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a public reporting company, we will need to comply with the
Sarbanes-Oxley Act of 2002 and the related rules and regulations
of the SEC, including expanded periodic reports, disclosures and
accelerated reporting requirements and more complex accounting
rules.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As directed by Section&nbsp;404 of the Sarbanes-Oxley Act of
2002, the SEC adopted rules requiring public companies to
include a report of management on the company&#146;s internal
controls over financial reporting in
</DIV>

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<DIV align="left" style="font-size: 10pt;">
their annual reports on Form&nbsp;10-K. In addition, the public
accounting firm auditing the company&#146;s financial statements
must attest to and report on management&#146;s assessment of the
effectiveness of the company&#146;s internal controls over
financial reporting. This requirement will first apply to our
annual report on Form 10-K for our fiscal year ending
December&nbsp;31, 2006. If we are unable to conclude that we
have effective internal controls over financial reporting or, if
our independent auditors are unable to provide us with an
unqualified report as to the effectiveness of our internal
controls over financial reporting as of December&nbsp;31, 2006
and future year ends as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in
the reliability of our financial statements, which could result
in a decrease in the value of our common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Risks Related to Clinical Trials and Other Regulatory
Matters</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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    <TD></TD>
    <TD>
    <B><I>If our clinical trials are unsuccessful, significantly
    delayed, or if we do not complete our clinical trials, we may
    not be able to commercialize our product candidates.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We must provide the FDA and similar foreign regulatory
authorities with pre-clinical and clinical data to demonstrate
that our product candidates are safe and effective for each
indication before they can be approved for commercialization.
The pre-clinical testing and clinical trials of any product
candidates that we develop must comply with the regulations of
numerous federal, state and local government authorities in the
U.S., principally the FDA, and by similar agencies in other
countries. Clinical development is a long, expensive and
uncertain process and is subject to delays. We may encounter
delays or rejections for various reasons, including our
inability to enroll enough patients to complete our clinical
trials.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
It may take several years to complete the testing of a product,
and failure can occur at any stage of development, for many
reasons, including:
</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    interim results of pre-clinical or clinical studies does not
    necessarily predict their final results, and acceptable results
    in early studies might not be seen in later studies;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    product candidates that appear promising at early stages of
    development may ultimately fail because the products may be
    ineffective, may be less effective than competitors&#146;
    products or may cause harmful side effects;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any pre-clinical or clinical test may fail to produce results
    satisfactory to the FDA or foreign regulatory authorities;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    pre-clinical or clinical data can be interpreted in different
    ways, which could delay, limit or prevent regulatory approval;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    negative or inconclusive results from a pre-clinical study or
    clinical trial or adverse medical events during a clinical trial
    could cause a pre-clinical study or clinical trial to be
    repeated or a program to be terminated, even if other studies or
    trials relating to the program are successful;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the FDA can place a clinical hold on a trial if, among other
    reasons, it finds that patients enrolled in the trial are or
    would be exposed to an unreasonable and significant risk of
    illness or injury;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    we may encounter delays or rejections based on changes in
    regulatory agency policies during the period in which we are
    developing a product candidate or the period required for review
    of any application for regulatory agency approval;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our clinical trials may not demonstrate the safety and efficacy
    of any product candidates or result in marketable products;</TD>
</TR>

</TABLE>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the FDA may change its approval policies or adopt new
    regulations that may negatively affect or delay our ability to
    bring a product candidate to market;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a product candidate may not be approved for all the indications
    which we request.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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    <TD></TD>
    <TD>
    <B><I>The development and approval process may take many years,
    require substantial resources and may never lead to the approval
    of a product. With the exception of Vantas, we do not have, and
    may never obtain, the regulatory approvals we need to market our
    product candidates. Our failure to obtain, or delays in
    obtaining, regulatory approvals would have a material adverse
    effect on our business, financial condition and results of
    operations.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Product candidates are subject to extensive and rigorous
government regulation by the FDA, other regulatory agencies, and
their respective foreign equivalents. The FDA regulates the
research, development, pre-clinical and clinical testing,
manufacture, safety, effectiveness, record keeping, reporting,
labeling, storage, approval, advertising, promotion, sale,
distribution, import and export of pharmaceutical products. Any
of our products marketed abroad will also be subject to
extensive regulation by foreign governments, whether or not we
have obtained FDA approval for a given product and its uses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Government regulation substantially increases the cost of
researching, developing, manufacturing and selling
pharmaceutical products. The regulatory review and approval
process, which includes pre-clinical testing and clinical trials
of each product candidate, is lengthy, expensive and uncertain.
We must obtain regulatory approval for each product we intend to
market, and the manufacturing facilities used for the products
must be inspected and meet legal requirements. Securing
regulatory approval requires the submission of extensive
pre-clinical and clinical data and other supporting information
for each proposed therapeutic indication in order to establish
the product&#146;s safety, efficacy, potency and purity for each
intended use. Moreover, approval policies or regulations may
change. We will not be able to commercialize our product
candidates until we obtain FDA approval in the U.S.&nbsp;or
approval by comparable authorities in other countries. The
development and approval process takes many years, requires
substantial resources and may never lead to the approval of a
product. We received FDA approval for the commercial sale of
Vantas in October 2004. Approval of any of our product
candidates is not anticipated until 2007 and thereafter. Failure
to obtain or delays in obtaining, regulatory approvals may:
</DIV>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    adversely affect the commercialization of any products that we
    develop;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    impose additional costs on us;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    diminish any competitive advantages that we may attain;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    adversely affect our receipt of revenues or royalties.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

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    <TD></TD>
    <TD>
    <B><I>Even if we receive regulatory approval for our product
    candidates, our approval may be limited and, we will be subject
    to significant ongoing regulatory obligations and
    oversight.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Even if we are able to obtain regulatory approval for a
particular product, the approval may limit the indicated uses
for the product, may otherwise limit our ability to promote,
sell and distribute the product, may require that we conduct
costly post-marketing surveillance and may require that we
conduct ongoing post-marketing studies. Material changes to an
approved product, such as manufacturing changes or revised
labeling, may require further regulatory review and approval.
Once obtained, any approvals may be withdrawn for a number of
reasons, including the later discovery of previously unknown
problems with the product. If we or our contract manufacturers
fail to comply with applicable regulatory requirements at any
stage during the regulatory process, such noncompliance could
result in:
</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    refusals or delays in the approval of applications or
    supplements to approved applications;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    refusal of a regulatory authority, including the FDA, to review
    pending market approval applications or supplements to approved
    applications;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    warning letters;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">13

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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    fines;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    import or export restrictions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    product recalls or seizures;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    injunctions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    total or partial suspension of clinical trials or production;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    civil penalties;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    withdrawals of previously approved marketing applications or
    licenses;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    recommendations by the FDA or other regulatory authorities
    against entering into governmental contracts with us;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    criminal prosecutions.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The regulatory approval process outside the
    U.S.&nbsp;varies depending on foreign regulatory requirements,
    and failure to obtain regulatory approval in foreign
    jurisdictions would prevent the marketing of our products
    abroad.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to also market our products outside of the
U.S.&nbsp;To market our products in the European Union and many
other foreign jurisdictions, we must obtain separate regulatory
approvals and comply with numerous and varying regulatory
requirements. Approval of a product by the comparable regulatory
authorities of foreign countries must still be obtained prior to
manufacturing or marketing that product in those countries. The
approval procedure varies among countries and can involve
additional testing, and the time required to obtain approval may
differ from that required to obtain FDA approval. The foreign
regulatory approval process includes all of the risks associated
with obtaining FDA approval set forth above, and approval by the
FDA does not ensure approval by the regulatory authorities of
any other country, nor does the approval by foreign regulatory
authorities in one country ensure approval by regulatory
authorities in other foreign countries or the FDA. We may not be
able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any foreign
market. If we fail to comply with these regulatory requirements
or obtain and maintain required approvals, our target market
will be reduced and our ability to generate revenue will be
adversely affected.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We rely on third parties to conduct certain of the
    clinical trials for our product candidates, and if they do not
    perform their obligations to us, we may not be able to obtain
    regulatory approvals for our product candidates.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We design the clinical trials for our product candidates, but we
rely on academic institutions, corporate partners, contract
research organizations and other third parties to assist us in
managing, monitoring and otherwise carrying out these trials.
Accordingly, we may have less control over the timing and other
aspects of these clinical trials than if they conducted them
entirely on our own. We are currently conducting the clinical
trials for VP002 (histrelin) for CPP, however, the data
management will be contracted to an outside data management
firm. We are also conducting the clinical trials for VP003
(octreotide)&nbsp;in Brazil, however, we have employed a local
contract research organization to monitor the trials for us, and
we will contract with a third party to handle the data
management. Although we rely on these third parties to manage
the data from these clinical trials, we are responsible for
confirming that each of our clinical trials is conducted in
accordance with its general investigational plan and protocol.
Moreover, FDA and foreign regulatory agencies require us to
comply with regulations and standards, commonly referred to as
good clinical practice, for conducting, recording and reporting
the results of clinical trials to assure that the data and
results are credible and accurate and that the trial
participants are adequately protected. Our reliance on third
parties does not relieve us of these responsibilities and
requirements, and we may fail to obtain regulatory approval for
our product candidates, if these requirements are not met.
</DIV>

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    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>As manufacturers of our products, we are subject to
    regulatory requirements. If we do not comply with such
    requirements, the development and sales of our products and our
    financial performance may be materially harmed.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pharmaceutical products are required to be manufactured under
current good manufacturing practice, or cGMP. Before
commercializing a new product, manufacturers must demonstrate
compliance with the applicable cGMP regulations, which include
quality control, and quality assurance requirements, as well as
the maintenance of extensive records and documentation.
Manufacturing facilities are subject to ongoing periodic
inspection by the FDA and corresponding foreign and state
authorities, including unannounced inspections, and must be
licensed before they can be used in commercial manufacturing for
products generated through the use of their technology. In
addition, cGMP requirements are constantly evolving, and new or
different requirements may apply in the future. After regulatory
approvals are obtained, the subsequent discovery of previously
unknown problems or the failure to maintain compliance with
existing or new regulatory requirements may result in
restrictions on the marketing of a product, withdrawal of the
product from the market, seizures, the shutdown of manufacturing
facilities, injunctions, monetary fines and civil or criminal
sanctions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may also encounter problems with the following:
</DIV>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    production yields;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    shortages of qualified personnel;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    compliance with FDA regulations, including the demonstration of
    purity and potency;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in FDA requirements;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    controlling production costs;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    development of advanced manufacturing techniques and process
    controls.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, we will be required to register our manufacturing
facilities with the FDA and other regulatory authorities. The
facilities will be subject to inspections confirming compliance
with cGMP or other regulations. If we fail to maintain
regulatory compliance, the FDA can impose regulatory sanctions
including, among other things, refusal to approve a pending
application for a new drug product, or revocation of a
pre-existing approval, which could have a material adverse
effect on our business, financial condition and results of
operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Risks Related to Intellectual Property</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our success depends on the protection of our intellectual
    property rights, and our failure to secure these rights would
    materially harm our business.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent that our
proprietary rights are covered by valid and enforceable patents
or are effectively maintained as trade secrets. We protect our
proprietary position by filing U.S. and foreign patent
applications related to our proprietary technology, inventions
and improvements that are important to the development of our
business. We may not be able to obtain patent protection for our
pending patent applications, those we may file in the future, or
those we may license from third parties. Moreover, patents
issued or that may be issued or licensed may not be enforceable
or valid or may expire prior to the commercialization of our
product candidates. The patent position of a pharmaceutical
company involves complex legal and factual questions and,
therefore, enforceability or validity cannot be predicted with
certainty. Patents, if issued, may be challenged, invalidated or
circumvented. Thus, any patents that we own or license from
third parties may not provide sufficient protection against our
competitors. Also, patent rights may not provide us with
proprietary protection or competitive advantages against
competitors with similar technology. Further, the laws of
foreign countries may not protect our intellectual property
rights to the same extent as do the laws of the U.S.
</DIV>

<P align="center" style="font-size: 10pt;">15

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    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>If we are unable to protect the confidentiality of our
    proprietary information and know-how, our competitive position
    would be impaired and our business could be adversely
    affected.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to patent protection, we also rely on the protection
of trade secrets, know-how and confidential and proprietary
information. To maintain the confidentiality of trade secrets
and proprietary information, we have entered into
confidentiality agreements with our employees, consultants and
collaborators upon the commencement of their relationships with
us. These agreements require that all confidential information
developed by the individual or made known to the individual by
us during the course of the individual&#146;s relationship with
us be kept confidential and not disclosed to third parties. Our
agreements with employees also provide that inventions conceived
by the individual in the course of rendering services to us
shall be our exclusive property. However, we may not obtain
these agreements in all circumstances, and individuals with whom
we have these agreements may not comply with the terms of these
agreements. In the event of unauthorized use or disclosure of
their trade secrets or proprietary information, these
agreements, even if obtained, may not provide meaningful
protection for our trade secrets or other confidential
information. Further, to the extent that our employees,
consultants or contractors use technology or know-how owned by
others in their work for us, disputes may arise as to the rights
in related inventions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Adequate remedies may not exist in the event of unauthorized use
or disclosure of our confidential information. The disclosure of
our trade secrets would impair our competitive position and
could harm our business.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our commercial success depends significantly on our
    ability to operate without infringing the patents and other
    proprietary rights of third parties.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Others may obtain patents that could limit our ability to use,
import, manufacture, market or sell products or impair our
competitive position. We cannot assure you that our products
and/or actions in developing or selling their products will not
infringe such patents. In the event our technologies infringe or
violate the proprietary rights of third parties, we may be
prevented from pursuing product development, manufacturing or
commercialization of our products that utilize such
technologies. Our failure to protect our patents or to obtain a
license to any technology that we may require have a material
adverse effect on our business, financial condition and results
of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Protecting our intellectual property is expensive and time
    consuming and could harm our business.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Third parties may challenge the validity of our patents and
other intellectual property rights, resulting in costly
litigation or other time-consuming and expensive proceedings,
which could deprive us of valuable rights. If we become involved
in any intellectual property litigation, interference or other
judicial or administrative proceedings, we will incur
substantial expenses and the diversion of financial resources
and technical and management personnel. An adverse determination
may subject us to significant liabilities or require us to seek
licenses that may not be available from third parties on
commercially favorable terms, if at all. Further, if such claims
are proven valid, through litigation or otherwise, we may be
enjoined from marketing, selling or licensing the affected
products and proprietary and intellectual property rights, and
we may be required to pay financial damages, which could have a
material adverse effect on our business, financial condition and
results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Risks Related to This Offering and Our Common Stock</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>There has been no prior market for our common stock, and
    it may trade at prices below the initial public offering
    price.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to this offering, there has been no public market for our
common stock. We cannot predict the extent to which a trading
market for our common stock will develop or be sustained after
this offering. The initial public offering price will be
determined by negotiations between us and the representatives of
the underwriters based on factors that may not be indicative of
future performance, and may not bear any relationship to the
price at which our common stock will trade upon completion of
this offering. You may be unable to sell your shares of common
stock at or above the initial public offering price.
</DIV>

<P align="center" style="font-size: 10pt;">16

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The trading price of the shares of our common stock could
    be highly volatile.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The trading price of the shares could be highly volatile in
response to various factors, many of which are beyond our
control, including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    developments concerning Vantas or any of our product candidates;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    announcements of technological innovations by us or our
    competitors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    new products introduced or announced by us or our competitors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in reimbursement levels;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in financial estimates by securities analysts;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    actual or anticipated variations in operating results;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    expiration or termination of licenses, research contracts or
    other collaboration agreements;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    conditions or trends in the regulatory climate and the
    biotechnology and pharmaceutical industries;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    intellectual property, product liability or other litigation
    against us;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in the market valuations of similar companies;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    sales of shares of our common stock, particularly sales by our
    officers, directors and significant stockholders.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, equity markets in general, and the market for
biotechnology and life sciences companies in particular, have
experienced substantial price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of companies traded in those markets. In addition,
changes in economic conditions in the U.S., Europe or globally,
could impact upon our ability to grow profitably. Adverse
economic changes are outside our control and may result in
material adverse impacts on the business or its results. These
broad market and industry factors may materially affect the
market price of the shares, regardless of our development and
operating performance. In the past, following periods of
volatility in the market price of a company&#146;s securities,
securities class-action litigation has often been instituted
against that company. Such litigation, if instituted against us
could cause us to incur substantial costs and divert
management&#146;s attention and resources, which could have a
material adverse effect on our business, financial condition and
results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>You will experience immediate and substantial dilution as
    a result of this offering and may experience additional dilution
    in the future.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If you purchase common stock in this offering, you will pay more
for your shares than the amounts paid by existing stockholders
for their shares. As a result, you will incur immediate and
substantial dilution of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, representing the difference between our pro forma net
tangible book value per share after giving effect to this
offering and the initial public offering price. In addition,
purchasers of shares of our common stock in this offering will
have contributed approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
of the aggregate price paid by all purchasers of our stock, but
will own only approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of
the shares of our common stock outstanding after this offering
based on the number of shares of our common stock outstanding as
of December&nbsp;31, 2004. In the past, we issued options to
acquire shares of common stock at prices significantly below the
initial public offering price. To the extent these options are
ultimately exercised, you will sustain future dilution. We may
also acquire or license other technologies or finance strategic
alliances by issuing equity, which may result in additional
dilution to our stockholders.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The ownership interests of our officers, directors and
    largest stockholders could conflict with the interests of our
    other stockholders.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Following completion of this offering, our directors, executive
officers and holders of 5% or more of our outstanding common
stock will beneficially own
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of our common
stock (after giving effect
</DIV>

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<DIV align="left" style="font-size: 10pt;">
to the conversion of all outstanding shares of our convertible
preferred stock, but assuming no exercise of the
underwriters&#146; over-allotment option and no exercise of
outstanding options). As a result, these stockholders, acting
together, will be able to significantly influence all matters
requiring approval by our stockholders, including the election
of directors and approval of mergers or other significant
corporate transactions. The interests of this group of
stockholders may not always coincide with our interests or the
interests of other stockholders.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our use of the offering proceeds may not yield a favorable
    return on your investment.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We expect to use the net proceeds from this offering to expand
our sales and marketing capabilities, fund our research and
development activities, expand our manufacturing capabilities
and for general corporate purposes. In addition, we may use a
portion of the net proceeds to acquire businesses, products or
technologies that are complementary to our current or future
business and product lines. Our management has broad discretion
over how these proceeds are used and could spend the proceeds in
ways with which you may not agree. Pending the use of the
proceeds in this offering, we may invest them. However, the
proceeds may not be invested effectively or in a manner that
yields a favorable or any return, and consequently, this could
result in financial losses that could have a material adverse
effect on our business, cause the price of our common stock to
decline and delay the development of our product candidates.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Delaware law and our amended and restated certificate of
    incorporation and amended and restated bylaws contain provisions
    that could delay and discourage takeover attempts that
    stockholders may consider favorable.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Certain provisions of our amended and restated certificate of
incorporation, or certificate of incorporation, and amended and
restated bylaws, or bylaws, and applicable provisions of
Delaware corporate law may make it more difficult for or prevent
a third party from acquiring control of us or changing our board
of directors and management. These provisions include:
</DIV>

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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our board of directors has the ability to issue preferred stock
    with voting or other rights or preferences;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    only the chairman of our board of directors, our president,
    secretary, any two or more directors, or stockholders who
    together own of record a majority of the outstanding stock of
    all classes entitled to vote upon written request, may call
    special meetings of our stockholders;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our stockholders must comply with advance notice procedures in
    order to nominate candidates for election to our board of
    directors or to place stockholders&#146; proposals on the agenda
    for consideration at meetings of stockholders.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any delay or prevention of a change of control transaction or
changes in our board of directors or management could deter
potential acquirors or prevent the completion of a transaction
in which our stockholders could receive a substantial premium
over the then current market price for their shares.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Future sales of our common stock may depress our stock
    price.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Persons who were our stockholders prior to the sale of shares in
our initial public offering continue to hold a substantial
number of shares of our common stock that they will be able to
sell in the public market in the near future. Significant
portions of these shares are held by a small number of
stockholders. Sales by our current stockholders of a substantial
number of shares, or the expectation that such sales may occur,
could significantly reduce the market price of our common stock.
Moreover, the holders of approximately 61,515,582&nbsp;shares of
our common stock, including shares issuable upon conversion of
our outstanding preferred stock, will have rights, subject to
certain conditions, to require us to file registration
statements to permit the resale of their shares in the public
market or to include their shares in registration statements
that we may file for ourselves or other stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The holders of
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our outstanding common stock as of December&nbsp;31, 2004
have agreed with the underwriters of our initial public offering
to be bound by a 180-day lock-up agreement that generally
prohibits these holders from selling or transferring their stock
until the end of the
</DIV>

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<DIV align="left" style="font-size: 10pt;">
180-day period, subject to specified exceptions. If we issue an
earnings release or material news or a material event relating
to us occurs during the 15 calendar days plus 3 business days
before the last day of the lock-up period, or if prior to the
expiration of the lock-up period, we announce that we will
release earnings results during the 16&nbsp;days following the
last day of the lock-up period, the restrictions provided in the
lock-up agreements will continue to apply until 18&nbsp;days
after the issuance of the earnings release or the occurrence of
material news or a material event. At any time and without
public notice, UBS Securities LLC and Banc of America Securities
LLC may in their sole discretion release all or some of the
securities from these lock-up agreements. If the restrictions of
the lock-up agreements are waived, shares of our common stock
will be available for sale into the market, subject only to
applicable securities rules and regulations, which may cause our
stock price to decline.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our quarterly financial results are likely to fluctuate
    significantly because our sales prospects are uncertain.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our quarterly operating results are difficult to predict and may
fluctuate significantly from period to period. The level of our
revenues, if any, and results of operations at any given time
will be based primarily on the following factors:
</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    success of the commercial launch of Vantas and any other product
    candidates that may be approved;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    changes in our ability to obtain FDA approval for our other
    product candidates;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    results of our clinical trials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    timing of new product offerings, acquisitions, licenses or other
    significant events by us or our competitors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    regulatory approvals and legislative changes affecting the
    products we may offer or those of our competitors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our ability to establish, grow and maintain a productive sales
    force;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    demand and pricing of products we may offer;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    physician and patient acceptance of Vantas and other products we
    may offer;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    levels of third-party reimbursement for Vantas and other
    products we may offer;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    interruption in the manufacturing or distribution of Vantas and
    other products we may offer;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the effect of competing technological and market developments.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As we have just launched Vantas, our first product, it will be
difficult for us to forecast demand for Vantas and our product
candidates that may be approved with any degree of certainty,
and therefore, our sales prospects are uncertain. In addition,
we will be increasing our operating expenses as we expand our
commercial capabilities. Accordingly, we may experience
significant, unanticipated quarterly losses. Because of these
factors, our operating results in one or more future quarters
may fail to meet the expectations of securities analysts or
investors, which could cause our stock price to decline
significantly.
</DIV>

<P align="center" style="font-size: 10pt;">19

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<DIV align="left" style="font-size: 10pt;">
<A name='103'></A>
</DIV>

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>FORWARD-LOOKING STATEMENTS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This prospectus contains forward-looking statements. These
forward-looking statements are not historical facts but rather
are based on current expectations, estimates and projections
about our industry, our beliefs and our assumptions. Words such
as &#147;anticipates,&#148; &#147;expects,&#148;
&#147;intends,&#148; &#147;plans,&#148; &#147;believes,&#148;
&#147;seeks&#148; and &#147;estimates,&#148; and variations of
these words and similar expressions, are intended to identify
forward-looking statements. These statements are not guarantees
of future performance and are subject to risks, uncertainties
and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ
materially from those expressed, implied or forecasted in the
forward-looking statements. In addition, the forward-looking
events discussed in this prospectus might not occur. These risks
and uncertainties include, among others, those described in
&#147;Risk Factors&#148; and elsewhere in this prospectus. You
are cautioned not to place undue reliance on these
forward-looking statements. You should read this prospectus, and
the documents that we refer to in this prospectus and have filed
as exhibits to the registration statement of which this
prospectus is a part, with the understanding that actual future
results and events may be materially different from what we
currently expect.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The forward-looking statements included in this prospectus
reflect our views and assumptions only as of the date of this
prospectus. Except as required by law, we undertake no
obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This prospectus also contains or refers to market data and
industry statistics, forecasts and projections that we obtained
from industry publications and publicly-available data. These
sources generally indicated that they have obtained their
information from sources believed to be reliable, but do not
guarantee the accuracy or completeness of their information. We
do not guarantee, and we have not independently verified this
information. Accordingly, investors should not place undue
reliance on this information.
</DIV>

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<A name='104'></A>
</DIV>

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>USE OF PROCEEDS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We will receive approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
in net proceeds from the sale of our common stock in this
offering, assuming an initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
which is the midpoint of the range set forth on the cover of
this prospectus, after deducting underwriting discounts and
commissions and estimated offering expenses. If the underwriters
exercise their over-allotment option in full, we estimate that
our net proceeds will be approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We currently expect to use the net proceeds of this offering as
follows:
</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    approximately
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
    to expand our sales and marketing capabilities;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    approximately
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
    to fund our research and development activities, including
    clinical trials;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    approximately
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
    to expand our manufacturing capabilities;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    approximately
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
    for general corporate purposes.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, we may use a portion of the net proceeds from this
offering to acquire products or technologies that are
complementary to our current or future business and product
lines, but we currently have no commitments, agreements, or
understandings relating to any of these types of transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that the net proceeds from this offering, together
with our existing cash, cash equivalents and short-term
investments, will be sufficient to meet our projected operating
requirements for at least the
next &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;months,
including our requirements related to the commercialization of
Vantas and further development of our product candidates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The allocation of the net proceeds of this offering described
above represents our best current estimate of our projected
operating requirements. However, the exact amount and timing of
our expenditures will depend on several factors, including the
success of our commercialization activities and the progress of
our clinical trials and other development efforts as well as the
amount of cash used in our operations. Accordingly, our
management will have broad discretion in the application of the
net proceeds and investors will be relying on the judgment of
our management regarding the application of the proceeds of this
offering. We reserve the right to change the use of these
proceeds as a result of certain contingencies such as the
results of our commercialization activities, competitive
developments, opportunities to acquire or in-license products,
technologies or businesses and other factors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pending the uses described above, we plan to invest the net
proceeds of this offering in short- and medium-term,
interest-bearing obligations, investment-grade instruments,
certificates of deposit or direct or guaranteed obligations of
the U.S.&nbsp;government.
</DIV>

<P align="center" style="font-size: 10pt;">21

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<DIV align="left" style="font-size: 10pt;">
<A name='105'></A>
</DIV>

<!-- link1 "DIVIDEND POLICY" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>DIVIDEND POLICY</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have not declared or paid any dividends to date. We currently
intend to retain future earnings, if any, to fund the
development and expansion of our business and do not anticipate
paying cash dividends on our common stock in the foreseeable
future. Any future determination to pay dividends will be at the
discretion of our board of directors and will depend on our
financial condition, results of operations, capital
requirements, restrictions contained in future financing
instruments and other factors our board of directors deems
relevant.
</DIV>

<P align="center" style="font-size: 10pt;">22

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10pt;">
<A name='106'></A>
</DIV>

<!-- link1 "CAPITALIZATION" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>CAPITALIZATION</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth our capitalization as of
December&nbsp;31, 2004:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    on an actual basis;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    on a pro forma basis to give effect to the automatic conversion
    of all of our outstanding convertible preferred stock into
    51,515,582&nbsp;shares of our common stock immediately prior to
    the closing of this offering;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    on a pro forma as adjusted basis to give further effect to the
    sale of a total
    of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of common stock in this offering at an assumed initial public
    offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, which is the midpoint of the range set forth on the cover
    of this prospectus, after deducting underwriting discounts and
    commissions and estimated offering expenses payable by us.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This table should be read in conjunction with
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&#148; and the financial
statements and the related notes and schedule thereto included
elsewhere in this prospectus.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="59%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>As of December&nbsp;31, 2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Pro Forma</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Actual</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Pro Forma</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>As Adjusted</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Long-term capitalized lease obligations, less current portion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>17,193</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>17,193</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Convertible Preferred Stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>39,924,995</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="13">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stockholders&#146; (deficit)&nbsp;equity:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common Stock, $.001&nbsp;par value, 75,000,000&nbsp;shares
    authorized, 10,000,000&nbsp;shares issued and outstanding
    actual; 61,515,582&nbsp;shares issued and outstanding pro forma;
    and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issued and outstanding, pro forma as adjusted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>61,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Additional paid-in capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,953,323</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,826,802</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred stock-based compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,532,766</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,532,766</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accumulated deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(38,317,116</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(38,317,116</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total stockholders&#146; (deficit)&nbsp;equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(29,886,559</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,038,436</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total capitalization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>10,055,629</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>10,055,629</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">23

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10pt;">
 <A name='107'></A>
</DIV>

<!-- link1 "DILUTION" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>DILUTION</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If you invest in our common stock your interest will be diluted
immediately to the extent of the difference between the initial
public offering price per share and the pro forma net tangible
book value per share after this offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our historical net tangible book value at December&nbsp;31,
2004, before adjustment for this offering, was approximately
$(29.9)&nbsp;million, or approximately $(2.99)&nbsp;per share.
Net tangible book value per share represents the amount of total
tangible assets less total liabilities, divided by the number of
shares of common stock outstanding. Pro forma net tangible book
value as of December&nbsp;31, 2004 was approximately
$10.0&nbsp;million or $0.16&nbsp;per share of common stock. Pro
forma net tangible book value gives effect to the conversion of
all of our outstanding convertible preferred stock into
51,515,582&nbsp;shares of our common stock, which will occur
automatically immediately prior to the closing of this offering
and to the reverse stock split. After giving effect to the sale
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock in this offering, at an assumed initial public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, which is the midpoint of the range set forth on the cover
of this prospectus, and after deducting the estimated offering
expenses, our pro forma net tangible book value at
December&nbsp;31, 2004 would have been
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;or
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. This represents an increase in net tangible book value of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to our existing stockholders and an immediate dilution
(i.e., the difference between the public offering price per
share and the net tangible book value per share adjusted for
this offering) at December&nbsp;31, 2004 of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to purchasers of the common stock offered hereby. The
following table illustrates this per share dilution:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 9pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="76%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Assumed initial public offering price per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Historical net tangible book value per share as of
    December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.99</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Increase in net tangible book value per share due to reverse
    stock split</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Increase in net tangible book value per share due to the
    conversion of all shares of preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma net tangible book value per share before the offering</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Increase in net tangible book value per share attributable to
    this offering</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma net tangible book value per share after this offering</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Dilution per share to new investors</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Assuming the underwriters&#146; over-allotment option is
exercised in full, the net tangible book value as of
December&nbsp;31, 2004 would have
been &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
or &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, the immediate increase in net tangible book value of
shares owned by existing stockholders would have been
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, and the immediate dilution to purchasers of common stock
in this offering would have been
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes as of December&nbsp;31, 2004,
after giving effect to this offering and the pro forma
adjustments described above, the number of shares of common
stock purchased from us, the total consideration paid to us for
those shares and the average price per share paid by the
existing stockholders and by the new investors.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="center" nowrap><B>Shares Purchased</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="center" nowrap><B>Total Consideration</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Average Price</B></TD>
</TR>

<TR>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Percent</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Amount</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Percent</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>per Share</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Existing stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50,668,966</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>39,872,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.79</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    New investors</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If the underwriters exercise their over-allotment option in
full, the following will occur:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the pro forma as adjusted percentage of shares of our common
    stock held by existing stockholders will decrease to
    approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of the total
    number of pro forma as adjusted shares of our common stock
    outstanding after this offering;&nbsp;and</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">24

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the pro forma as adjusted number of shares of our common stock
    held by new public investors will increase
    to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
    or approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of the total
    pro forma as adjusted number of shares of our common stock
    outstanding after this offering.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The tables and calculations above are based on shares
outstanding as of December&nbsp;31, 2004 and exclude:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    6,716,550&nbsp;shares of our common stock issuable upon exercise
    of options outstanding as of December&nbsp;31, 2004, at a
    weighted average exercise price of $0.64&nbsp;per share, of
    which options to purchase 2,004,888&nbsp;shares were exercisable
    as of that date;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    1,133,450&nbsp;shares of our common stock available for future
    grant under the Valera Pharmaceuticals, Inc. Equity Incentive
    Plan as of December&nbsp;31, 2004.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">25

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10pt;">
<A name='108'></A>
</DIV>

<!-- link1 "SELECTED HISTORICAL FINANCIAL DATA" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SELECTED HISTORICAL FINANCIAL DATA</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following tables set forth our selected historical financial
data as of December&nbsp;31, 2003 and 2004 and for the years
ended December&nbsp;31, 2002, 2003 and 2004, which have been
derived from our audited financial statements, included
elsewhere in this prospectus. The selected historical financial
data as of December&nbsp;31, 2000, 2001 and 2002 and for the
period from May&nbsp;30, 2000 to December&nbsp;31, 2000 and the
year ended December&nbsp;31, 2001 have been derived from our
audited financial statements, which are not included in this
prospectus. We have also presented financial data while we were
a division of GP Strategies Corporation for the period of
January&nbsp;1, 2000 through May&nbsp;&nbsp;29, 2000. It is
important that you read this information together with
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&#148;, &#147;Risk
Factors&#148; and our financial statements and related notes and
schedule to these financial statements beginning on page F-1 of
this prospectus. The historical results presented below are not
necessarily indicative of the results to be expected in any
future period.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="24%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>For the</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Predecessor</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Period</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Five Months</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>May&nbsp;30,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000 to</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>May&nbsp;29,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Restated)<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net product sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>120,282</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>47,073</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>8,521</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>15,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>7,353</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,511,286</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Licensing revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43,183</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>39,398</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>134,636</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total net revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>163,465</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>86,471</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,521</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,353</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,645,922</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating costs and expenses:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of product sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>608,150</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>824,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,147,741</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,616,136</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,319,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,229,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,375,819</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling and marketing</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>269,633</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>509,514</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,025,038</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    General and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,507,003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>609,688</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,521,892</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,324,378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,838,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,897,435</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total operating expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,331,520</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,757,429</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,138,028</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,913,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,577,144</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,906,442</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,168,055</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,670,958</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,129,507</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,898,714</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,569,791</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,260,520</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest income (expense), net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,747</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(23,750</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(30,398</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,919</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,134</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,152</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss before income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,170,802</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,694,708</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,159,905</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,266,672</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Benefit for income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(243,618</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,170,802</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,694,708</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,159,905</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,023,054</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deemed
    dividend<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,139,535</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,860,465</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss attributable to common stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2,170,802</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,694,708</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(4,159,905</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(8,696,192</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(17,883,519</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss attributable to common stockholders
    per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.72</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.56</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.34</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.59</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.87</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.79</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted average shares outstanding&nbsp;&#151; basic and diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,095,890</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unaudited pro forma basic and diluted net loss per
    share<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.40</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unaudited pro forma weighted average shares outstanding basic
    and diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44,206,980</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">26

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="27%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>As of December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Restated)<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance Sheet Data:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,620,869</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>640,577</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,241,246</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,052,643</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Working capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(92,874</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,657,823</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(403,548</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,585,488</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,306,324</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>586,251</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,172,082</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,296,188</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,664,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,323,193</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Long-term liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>200,711</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>123,887</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>66,753</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,193</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Convertible preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,603,856</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,603,856</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,469,446</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>39,924,995</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accumulated deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,694,708</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,854,610</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(11,737,405</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(20,433,597</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(38,317,116</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total stockholders&#146; (deficit) equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>186,081</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(582,051</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(6,464,846</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(15,158,330</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(29,886,559</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    We have determined that in connection with the issuance of our
    series&nbsp;B convertible preferred stock, certain anti-dilution
    provisions in our series&nbsp;A convertible preferred stock were
    activated. Because the shares of series&nbsp;B convertible
    preferred stock were sold at a price below the price that the
    shares of series&nbsp;A convertible preferred stock were sold,
    the conversion price and conversion ratio of the series&nbsp;A
    convertible preferred stock were adjusted in accordance with the
    original terms of that issuance when each tranche of
    series&nbsp;B convertible preferred stock was issued. These
    adjustments to the conversion price and the resulting conversion
    ratio resulted in deemed dividends being afforded to the holders
    of the series&nbsp;A convertible preferred stock. The total
    deemed dividend was not originally recorded in our 2003
    financial statements, but such statements have been restated to
    reflect this deemed dividend.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    The pro forma net loss per share information is computed using
    the weighted average number of common shares outstanding, after
    giving pro forma effect to the automatic conversion of all
    outstanding shares of our convertible preferred stock into
    shares of common stock effective upon the completion of this
    offering, as if the conversion had occurred at the date of the
    original issuance.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">27

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10pt;">
 <A name='109'></A>
</DIV>

<!-- link1 "MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>FINANCIAL CONDITION AND RESULTS OF OPERATIONS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>The following discussion and analysis should be read in
conjunction with our financial statements and the related notes
and schedule thereto appearing elsewhere in this prospectus.
This discussion and analysis may contain forward-looking
statements based upon current expectations that involve risks
and uncertainties. Our actual results may differ materially as a
result of various factors, including those set forth under
&#147;Risk Factors&#148; or elsewhere in this prospectus.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Overview</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are a fully-integrated specialty pharmaceutical company
concentrating on the development and commercialization of
products for the treatment of urological and endocrine
conditions, diseases and disorders. Our first product, Vantas,
was approved by the FDA in October 2004. Vantas is a 12-month
implant that delivers histrelin, a luteinizing hormone-releasing
hormone agonist, or LHRH agonist, for the palliative treatment
of advanced prostate cancer. We began selling Vantas in November
2004 utilizing our sales force that is currently calling on the
urologists in the U.S. that account for the majority of LHRH
agonist product sales.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Total U.S. sales of LHRH agonist products for the palliative
treatment of prostate cancer were approximately
$974&nbsp;million in 2004 based on IMS Health Incorporated data,
with the leading products being the three- and four-month
injection formulations. We believe that Vantas has a competitive
advantage over these products because it delivers an even,
predetermined dose of LHRH agonist over a 12-month period, and
is the only product indicated for the palliative treatment of
advanced prostate cancer that delivers histrelin, the most
potent LHRH agonist available.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to Vantas, a hydrogel implant based on our patented
Hydron Technology, we are developing a pipeline of proprietary
product candidates for indications that include central
precocious puberty, acromegaly, opioid addiction and
interstitial cystitis. Several of our product candidates also
utilize our Hydron Technology delivery system. We intend to
leverage our existing specialized sales force to market certain
of our product candidates, if approved, since the indications of
these product candidates are treated by many of the same
physicians we are calling on for Vantas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Basis of Presentation</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Product Sales and Costs</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We generate revenues from sales of Vantas, our lead product. We
began commercial sales of Vantas in November 2004. Currently,
all sales are in the U.S. We distribute Vantas directly to
physicians, or through International Urology Network, or IUN, a
group purchasing organization, or GPO, and a subsidiary of
AmerisourceBergen Corporation. Approximately 10% of our sales
went through IUN in 2004. Our business may be affected by
physician utilization, pricing pressure and Medicare or third
party reimbursement, as well as other factors which may cause
variances in our revenue. We describe the factors affecting
reimbursement in more detail in the section entitled
&#147;Business&nbsp;&#151; Reimbursement&#148; in this
prospectus.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In prior years, we received all of our revenue from the sale of
certain polymer products. We discontinued manufacturing these
polymers in 1996, as they were no longer profitable, so that we
could concentrate all of our efforts on developing
pharmaceutical products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our cost of product sales are all related to the production of
Vantas and represent the cost of materials, overhead associated
with the manufacture of Vantas, direct labor, delivery charges,
lab services and royalties. We expect our margins to improve as
the sales of Vantas increase, and other products are
commercialized. Prior to October 2004, we expensed all of our
manufacturing costs as research and development. Aggregate
royalty costs were $307,258 or 5% of net revenue for the year
ending December&nbsp;31, 2004. No royalties were due in prior
years. For a more complete description of our royalty
arrangements, see &#147;Business&nbsp;&#151; Material
Agreements.&#148;
</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Research and Development Expenses</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our research and development expenses consist of costs incurred
for company-sponsored and collaborative research and development
activities. These expenses consist primarily of direct and
research-related allocated overhead expenses such as facilities
costs, salaries and benefits and material supply costs.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Selling and Marketing Expenses</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Selling and marketing expenses consist primarily of sales and
marketing personnel compensation, sales force incentive
compensation, travel, tradeshows, promotional materials and
programs, advertising and healthcare provider education
materials and events.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>General and Administrative Expenses</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our general and administrative expenses consist primarily of
personnel expenses for accounting, human resources, outside
consulting, information technology and corporate administration
functions. Other costs include administrative facility costs and
professional fees for legal and accounting services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Critical Accounting Policies and Estimates</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our discussion and analysis of our financial condition and
results of operations are based on our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the U.S.&nbsp;The preparation
of these financial statements requires us to make judgments,
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements as well
as the reported revenue and expenses during the reporting
periods. We continually evaluate our judgments, estimates and
assumptions. We base our estimates on the terms of underlying
agreements, the expected course of development, historical
experience and other factors that we believe are reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The list below is not intended to be a comprehensive list of all
of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated
by generally accepted accounting principles, or GAAP. There are
also areas in which our management&#146;s judgment in selecting
any available alternative would not produce a materially
different result. Our audited financial statements and the notes
thereto included elsewhere in the prospectus contain accounting
policies and other disclosures required by GAAP.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Revenue Recognition</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our revenue recognition policies are in accordance with
Securities and Exchange Commission Staff Accounting Bulletin
No.&nbsp;104, or SAB&nbsp;No.&nbsp;104, <I>Revenue Recognition
in Financial Statements</I>, which provides guidance on revenue
recognition in financial statements, and is based on the
interpretations and practices developed by the Securities and
Exchange Commission. SAB&nbsp;104 requires that four basic
criteria must be met before revenue can be recognized:
(1)&nbsp;persuasive evidence of an arrangement exists;
(2)&nbsp;delivery has occurred or services rendered;
(3)&nbsp;the seller&#146;s price to the buyer is fixed and
determinable; and (4)&nbsp;collectibility is reasonably assured.
Determination of criteria&nbsp;(3) and (4) are based on our
management&#146;s judgments regarding the fixed nature of the
fee charged for products delivered and the collectibility of
those fees. Should changes in conditions cause our management to
determine that these criteria are not met for certain future
transactions, revenue recognition for those transactions will be
delayed and our revenues could be adversely affected.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Pre-clinical Study and Clinical Trial Expenses</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Research and development expenditures are charged to operations
as incurred. Our expenses related to clinical trials are based
on actual and estimates of the services received and efforts
expended pursuant to
</DIV>

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<DIV align="left" style="font-size: 10pt;">
contracts with multiple research institutions and clinical
research organizations that conduct and manage clinical trials
on our behalf. The financial terms of these agreements are
subject to negotiation and vary from contract to contract and
may result in uneven payment flows. Generally, these agreements
set forth the scope of work to be performed at a fixed fee or
unit price. Payments under the contracts depend on factors such
as the successful enrollment of patients or the completion of
clinical trial milestones. Expenses related to clinical trials
generally are accrued based on contracted amounts applied to the
level of patient enrollment and activity according to the
protocol. If timelines or contracts are modified based upon
changes in the clinical trial protocol or scope of work to be
performed, we modify our estimates accordingly on a prospective
basis.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Stock-based Compensation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In December&nbsp;2002, Statement of Financial Accounting
Standards, or SFAS No.&nbsp;148, <I>Accounting for Stock-Based
Compensation&nbsp;&#151; Transition and Disclosure&nbsp;&#151;
an Amendment of FASB Statement No.&nbsp;123</I> was issued.
SFAS&nbsp;No.&nbsp;148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation from the
intrinsic value-based method of accounting prescribed by
Accounting Principles Board, or APB, Opinion No.&nbsp;25,
<I>Accounting for Stock Issued to Employees</I>, or APB&nbsp;25.
In addition, SFAS&nbsp;No.&nbsp;148 amends the disclosure
requirements of SFAS&nbsp;No.&nbsp;123, <I>Accounting for Stock
Based Compensation</I>. We adopted the disclosure requirements
of SFAS&nbsp;No.&nbsp;148 effective December&nbsp;31, 2002. As
allowed by SFAS&nbsp;No.&nbsp;123, we have elected to continue
to apply the intrinsic value-based method of accounting
prescribed in APB&nbsp;No.&nbsp;25 and, accordingly, do not
recognize compensation expense for stock option grants made at
an exercise price equal to or in excess of the estimated fair
value of the stock at the date of grant. Deferred compensation
is recognized and amortized on an accelerated basis in
accordance with Financial Accounting Standards Board
Interpretation No.&nbsp;28, <I>Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans</I>, over
the vesting period of the related options.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We account for options issued to non-employees under
SFAS&nbsp;No.&nbsp;123 and Emerging Issues Task Force, or EITF,
Issue&nbsp;96-18, <I>Accounting for Equity Investments that are
Issued to Other than Employees for Acquiring or in Conjunction
with Selling Goods or Services</I>. As such, the value of such
options is periodically remeasured and income or expense is
recognized during their vesting terms. The amount of stock-based
compensation expense to be recorded in future periods may
decrease if unvested options, for which deferred stock
compensation has been recorded, are subsequently canceled.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Valuation of Inventory</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We value inventory at the lower of cost, or market, on a first
in first out, or FIFO, basis. We calculate an inventory reserve
for estimated obsolescence or excess inventory based upon
historical demand and assumptions about future demand for our
products and market conditions. If our current assumptions about
future demand change and if actual market conditions are less
favorable than anticipated, additional inventory reserves may be
required which would negatively impact our gross margin.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Cost of Product Sales</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Royalty costs are included as a cost of product sales. The
royalty costs are determined by applying the royalty rate in
each license agreement to the specific product offering included
in that particular agreement, including any deductions to sales
or royalty cost allowed under the royalty terms. The
determination of royalty costs can be affected by various
factors including changes in the terms of the underlying
agreements, changes in our interpretation of the application of
the terms of the underlying agreement, changes in the level of
revenue, changes in the level of allowed deductions and
additional product licenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We expect our margins to improve as the sales of Vantas
increase, and other products are commercialized. If our current
assumptions about additional sales and product approval change,
or if actual market conditions are less favorable than
anticipated, additional inventory reserves may be required which
would negatively impact our gross margin.
</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Allowance for Doubtful Accounts</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We maintain an allowance for doubtful accounts related to the
estimated losses that may result from the inability of our
customers to make required payments. This allowance is
determined based upon historical experience, industry
experience, investigative techniques, and any specific customer
collection issues that have been identified. We only recently
began selling our first product, Vantas, in November&nbsp;2004.
Accordingly, we do not have significant history to draw upon.
Deterioration in our ability to collect our receivables could
result in an increase in our allowance for doubtful accounts and
increase our general and administrative expenses.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Income Taxes</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. In the event we were to determine that we would be
able to realize our deferred tax assets in the future in excess
of their net recorded amounts, an adjustment to the deferred tax
assets would increase our income in the period such
determination was made. For the years ended December&nbsp;31,
2002, 2003, and 2004, we had net deferred tax assets prior to
valuation allowance of $2.5&nbsp;million, $5.7&nbsp;million, and
$10.6&nbsp;million respectively, which were fully offset by a
valuation allowance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Results of Operations</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Comparison of Years Ended December&nbsp;31, 2003 and
    2004</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Net Product Sales.</I> After receiving FDA approval in
October&nbsp;2004 of our lead product Vantas, we commenced
commercial sales in November&nbsp;2004. Net sales for the year
ending December&nbsp;31, 2004 were $5,511,286. We sold
approximately 2,200&nbsp;units of Vantas at an average net
selling price of approximately $2,500. Net sales for the year
ending December&nbsp;31, 2003 were $7,353 and were completely
derived from the sale of certain polymer products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Licensing Revenue.</I> During the year ended
December&nbsp;31, 2003 through September 2004 we did not
recognize any licensing revenue, as we were attempting to
eliminate the cross licensing arrangement we have with Hydron
Technologies. During this time, no licensing fees were paid to
us. In 2004, back fees of $134,636 were paid, as an agreement
with Hydron Technologies to terminate the cross licensing
agreement could not be reached. We estimate that we will receive
royalties of approximately $35,000 annually in the future under
this arrangement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Cost of Product Sales.</I> Our cost of product sales for the
year ending December&nbsp;31, 2004 was $608,150 resulting in a
gross margin of 89%. Such gross margin includes the sale of
1,020 units of products manufactured prior to FDA approval. In
the future, we expect our gross margin to be lower as we sell
through product at fully burdened manufacturing cost. The cost
of product sales calculation includes an accrued royalty expense
of $307,258 for the year ended December&nbsp;31, 2004. Through
October&nbsp;2004, all manufacturing costs were included in
research and developments costs. There were no sales for the
year ended December&nbsp;31, 2003 that were subject to a
royalty. For the year ended December&nbsp;31, 2003, there was
not a cost of product sales, as the value of the polymer
products were written off in prior years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Research and Development Expenses.</I> Research and
development expense for the years ended December&nbsp;31, 2003
and 2004 were $5,229,529 and $6,375,819, respectively. The 21.9%
increase from 2003 to 2004 was primarily attributable to
manufacturing costs of Vantas through October&nbsp;2004, and a
stock-based compensation charge of $297,314.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Expenses related to clinical trials pursuant to contracts with
research institutions and clinical research organizations
represented 55% of our total research and development expenses
in 2003 and 24% of our research and development expenses in 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Selling and Marketing Expenses.</I> Selling and marketing
expense for the years ending December&nbsp;31, 2003 and 2004
were $509,514 and $5,025,038 respectively. The increase in 2004
over 2003 was primarily the result of expenses related to the
launch of our lead product Vantas in November 2004. We hired a
national
</DIV>

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sales force consisting of approximately thirty experienced
individuals. In addition, marketing expense was increased due to
the promotion of Vantas and a stock-based compensation charge of
$579,884.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>General and Administrative Expenses.</I> General and
administrative expenses were $1,838,101 for 2003, and $5,897,435
for 2004. The increase from 2003 to 2004 was primarily
attributable to a stock-based compensation charge of $2,226,988,
the hiring of additional personnel, increased legal fees
associated with pursuing and maintaining patent protection for
our product candidates and other corporate matters, accounting
fees relative to our expanding business, and other professional
services required to support the hiring of personnel.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Stock-Based Compensation.</I> We recorded non-cash
compensation charges of $2,708 and $51,104 in 2003 and 2004,
respectively, relative to non-employee stock options. The
exercise price of all options issued prior to 2003 was amended
to $0.50 in October&nbsp;2003, the fair market value. In
connection with the grant of stock options to employees, we
recorded stock-based compensation of $3,031,119 in 2004 which is
related to a repricing of grants made in 2002. In accordance
with FASB Interpretation, or FIN, No.&nbsp;44, the re-priced
options will be accounted for as variable from the date of the
modification to the date the accruals are exercised, forfeited,
or expire. The 2004 stock-based compensation charge also
includes stock-based compensation of $73,067 for stock options
granted in 2004 at prices below the deemed fair value on the
option grant dates. The stock-based compensation is included in
the following line items in the statement of operations:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="84%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    General and administration</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,226,988</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Sales and marketing</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>579,884</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>297,314</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Net Interest Income (Expense).</I> Net interest income was
$13,134 in 2003 and $(6,152) in 2004. The variances are
primarily attributable to fluctuations in our average cash
balances and lower interest rates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Income Taxes.</I> We have incurred net operating losses since
inception and, consequently, have not recorded any federal or
state income tax benefit. In 2004, the New Jersey Economic
Development Authority approved our application to sell New
Jersey State income tax benefits under the New Jersey Technology
Tax Transfer Program. During the fourth quarter of 2004, we
recognized $243,618 from the sale of State of New Jersey income
tax benefits. The program requires that we maintain certain
employment levels in New Jersey and that the proceeds from the
sale of the tax benefits be spent in New Jersey. Our deferred
tax assets primarily consist of net operating loss carryforwards
and research and development tax credits. We have recorded a
valuation allowance for the full amount of our deferred tax
asset, as the realization of the deferred tax asset is
uncertain. As of December&nbsp;31, 2004, we had federal and
state tax net operating loss carryforwards of approximately
$20.0&nbsp;million and $17.0&nbsp;million, respectively. These
federal and state tax loss carryforwards will begin expiring in
2022 for federal purposes and 2011 for state purposes. Annual
limitations may result in the expiration of net operating loss
and credit carryforwards before they are used. Under the
provisions of the Internal Revenue Code, substantial changes in
our ownership may limit the amount of net operating loss
carryforwards that could be utilized annually in the future to
offset taxable income.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Comparison of Years Ended December&nbsp;31, 2002 and
    2003</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Net Product Sales.</I> Product sales for the years ending
December&nbsp;31, 2002 and 2003 were derived from the sale of
certain polymer products. There was no cost of product sales as
the value of the polymer products were written off in prior
years. Net product sales for 2002 and 2003 were $15,006 and
$7,353 respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Licensing Revenue.</I> For the years ended December&nbsp;31,
2002 and 2003 no licensing fees were paid to us as we were
attempting to eliminate the cross licensing arrangement we have
with Hydron Technologies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Research and Development Expenses.</I> Research and
development expense for the years ended December&nbsp;31, 2002
and 2003 were $4,319,709 and $5,229,529, respectively. The 21.1%
increase from 2002 to 2003 was primarily attributable to the
hiring of additional consultants and increased clinical trial
activities associated with the completion of our Phase&nbsp;III
clinical trials of our lead product Vantas.
</DIV>

<P align="center" style="font-size: 10pt;">32

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Expenses related to clinical trials pursuant to contracts with
research institutions and clinical research organizations
represented 58% of our total research and development expenses
in 2002 and 55% of our total research and development expenses
in 2003.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Selling and Marketing Expenses.</I> Selling and marketing
expense for the years ending December&nbsp;31, 2002 and 2003
were $269,633 and $509,514 respectively. The 89.0% increase in
2003 over 2002 was predominantly due to additional market
research costs and related materials, attending urological
conferences and business development.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>General and Administrative Expenses.</I> General and
administrative expenses were $1,324,378 for 2002 and $1,838,101
for 2003. The 38.8% increase from 2002 to 2003 was largely due
to additional legal and consulting fees required to complete the
new drug application filed in December&nbsp;2003 for Vantas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Stock-Based Compensation.</I> We recorded non-cash
compensation charges of $2,708 in 2003 relative to non-employee
stock options. There were no options granted to non-employees in
2002. The exercise price of all options issued prior to 2003 was
amended in October 2003 to $0.50, the fair market value at that
time.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Net Interest Income (Expense).</I> Net interest income was
$15,919 in 2002 and $13,134 in 2003. The variance is primarily
attributable to fluctuations in our average cash balances and
lower interest rates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Liquidity and Capital Resources</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have financed our operations primarily from private
placements of our equity securities, and as of December&nbsp;31,
2004, we had received total consideration of approximately
$33&nbsp;million from the issuance of our series&nbsp;A, B and C
convertible preferred stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2004, cash and cash equivalents were
$5,052,643, compared to $5,241,246 as of December&nbsp;31, 2003.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net cash used in operating activities was $12,141,622 for 2004.
The primary use of cash was to fund net losses for the period,
adjusted for non-cash expenses including $257,495 for
depreciation and amortization and $3,155,290 in stock-based
compensation expense. In addition, working capital increased by
$3,780,836 as a result of the commercialization of Vantas and
the related increase in accounts receivable and inventory.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net cash used in investing activities was $1,610,378 for 2004.
These activities consisted of purchases of manufacturing
equipment and leasehold improvements to our facilities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net cash provided by financing activities was $13,563,397 in
2004. This activity consisted primarily of the private sales of
convertible preferred stock, which was offset in part by ongoing
payment of capitalized lease obligations. The principal balance
of our capitalized lease obligations was $35,066 at
December&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In November&nbsp;2004, we launched Vantas, and net sales for the
period ended December&nbsp;31, 2004 were $5,511,286. We
anticipate that cash flows from sales of Vantas will reduce our
need for additional financing. We expect our cash requirements
to continue to increase in the foreseeable future as we continue
to sponsor additional clinical trials, seek regulatory approvals
of, and develop, manufacture and market our current product
candidates. As we continue to expand our commercial organization
to include the development of our field sales force, expand our
research and development efforts and pursue additional
opportunities, we anticipate significant cash requirements for
hiring of personnel, capital expenditures and investment in
additional internal systems and infrastructure.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The amount and timing of cash requirements will depend on market
acceptance of our lead product, Vantas, and regulatory as well
as market acceptance of our product candidates, if any, and the
resources we devote to researching, developing, formulating,
manufacturing, commercializing and supporting our product
candidates, and our ability to enter into third-party
collaborations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that our current cash, cash equivalents and
short-term investments, together with the proceeds from this
offering, will be sufficient to fund our operations for at least
the next 12&nbsp;months. Until we can generate significant cash
from our operations, we expect to continue to fund our
operations with existing
</DIV>

<P align="center" style="font-size: 10pt;">33

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<DIV align="left" style="font-size: 10pt;">
cash resources that were primarily generated from the proceeds
of offerings of our equity securities. In addition, we may
receive revenue from our sublicense agreements with Paladin Labs
Inc., Key Oncologics (Pty) Ltd. and BioPro Pharmaceutical, Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may finance future cash needs through strategic collaboration
agreements, the sale of other equity securities or debt
financing. However, we may not be successful in obtaining
collaboration agreements or in receiving milestone or royalty
payments under those agreements. In addition, we cannot be sure
that in the future our existing cash resources will be adequate
or that additional financing will be available when needed or
that, if available, financing will be obtained on terms
favorable to us or our stockholders. Insufficient funds may
require us to delay, scale back or eliminate some or all of our
research or development programs or delay the launch of our
product candidates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Contractual Obligations and Commitments</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes our long-term contractual
obligations as of December&nbsp;31, 2004.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="23%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap><B>Payments Due in</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Contractual Obligations</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2006</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2007</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2008</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2009</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>After 2009</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating
    leases<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$7,757,985</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$826,753</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$844,877</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$839,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$839,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$839,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$3,567,864</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Capital lease obligations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>41,039</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,316</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18,723</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued
    royalties<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>307,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>307,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$8,106,282</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$1,156,327</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$863,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$839,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$839,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$839,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>$3,567,864</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>(1)</TD>
    <TD align="left">
    On March&nbsp;8, 2005, we entered into an additional building
    lease of approximately 21,300&nbsp;square feet for our office
    and research and development needs. The lease will be
    co-terminus with our existing building lease. From inception
    through June&nbsp;30, 2005, the base rent will be
    $43,044&nbsp;per month. From July&nbsp;1, 2005 until
    June&nbsp;30, 2010, the annual base rent will be $537,808.
    Commencing July&nbsp;1, 2010, the annual base rent will be
    $707,999.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)</TD>
    <TD align="left">
    Royalty payments have only been determined for 2005 based upon
    2004 sales. Future royalties have not been estimated as they are
    based on future sales levels.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Off-balance Sheet Arrangements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2004 we did not have any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Quantitative and Qualitative Disclosures About Market Risk</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To date, all of our sales have been denominated in
U.S.&nbsp;dollars, although we do conduct some clinical and
safety studies with vendors located outside the U.S.&nbsp;All of
these expenses are paid in U.S.&nbsp;dollars. If the exchange
rate undergoes a change of 10%, we do not believe that it would
have a material impact on our results of operations or cash
flows. Accordingly, we believe that there is no material
exposure to risk from changes in foreign currency exchange rates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We hold no derivative financial instruments and do not currently
engage in hedging activities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our exposure to interest rate risk at December&nbsp;31, 2004 is
related to the investment of our excess cash into highly liquid
financial investments with original maturities of three months
or less. We invest in money market funds in accordance with our
investment policy. The primary objectives of our investment
policy are to preserve principal, maintain proper liquidity to
meet operating needs and maximize yields. Our investment
</DIV>

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<DIV align="left" style="font-size: 10pt;">
policy specifies credit quality standards for our investments.
Due to the short term nature of our investments, we have
assessed that there is no material exposure to interest rate
risk arising from them.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Recent Accounting Pronouncements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On December&nbsp;16, 2004, FASB issued SFAS&nbsp;No.&nbsp;123
(revised 2004), <I>Share-Based Payment</I>, which is a revision
of SFAS&nbsp;No.&nbsp;123, <I>Accounting for Stock-Based
Compensation.</I> SFAS&nbsp;123(R) supersedes APB&nbsp;25 and
amends SFAS&nbsp;No.&nbsp;95 <I>Statement of Cash Flows</I>.
Generally, the approach in SFAS&nbsp;123(R) is similar to the
approach described in SFAS&nbsp;123. However, SFAS&nbsp;123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no
longer an alternative.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
SFAS&nbsp;123(R) must be adopted no later than July&nbsp;1,
2005. Early adoption will be permitted in periods in which
financial statements have not been issued. We expect to adopt
SFAS&nbsp;123(R) on July&nbsp;1, 2005.
</DIV>

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<DIV align="left" style="font-size: 10pt;">
 <A name='110'></A>
</DIV>

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>BUSINESS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are a fully-integrated specialty pharmaceutical company
concentrating on the development and commercialization of
products for the treatment of urological and endocrine
conditions, diseases and disorders. Our first product, Vantas,
was approved by the FDA in October 2004. Vantas is a 12-month
implant that delivers histrelin, a luteinizing hormone-releasing
hormone agonist, or LHRH agonist, for the palliative treatment
of advanced prostate cancer. We began marketing Vantas in
November 2004 utilizing our sales force that is currently
calling on the urologists in the U.S. that account for the
majority of LHRH agonist product sales. In addition to Vantas,
we are developing a pipeline of proprietary product candidates
for indications that include central precocious puberty,
acromegaly, opioid addiction and interstitial cystitis.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Total U.S.&nbsp;sales of LHRH agonist products for the
palliative treatment of prostate cancer were approximately
$974&nbsp;million in 2004 based on IMS Health Incorporated data,
with the leading products being three- and four-month injection
formulations. We believe that Vantas has a competitive advantage
over these products because it delivers an even, controlled dose
of LHRH agonist over a 12-month period, and is the only product
indicated for the palliative treatment of advanced prostate
cancer that delivers histrelin, the most potent LHRH agonist
available.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Vantas is a hydrogel implant based on our patented Hydron
Technology. Hydron Technology is a drug delivery system that
allows us to control the amount and timing of the release of
drugs into the body for up to 12&nbsp;months. Several of our
product candidates utilize Hydron Technology delivery system. We
intend to leverage our specialized sales force to market certain
of our product candidates, if approved, since the indications of
these product candidates are treated by many of the same
physicians we are calling on for Vantas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Competitive Strengths</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that our key competitive strengths that distinguish
us from our competitors include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Technology.</I> We believe that Hydron Technology offers
    significant advantages over existing drug delivery systems.
    Implants using Hydron Technology can be adapted to deliver many
    kinds of drugs over an extended period of time. In addition,
    these implants are soft and flexible, which enhances patient
    comfort. Further, because we own the manufacturing know-how to
    develop products utilizing Hydron Technology, we are able to
    control and maximize the potential commercial uses of this
    technology.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Development Capability.</I> As demonstrated by Vantas, we
    have the internal capability to efficiently develop a product
    and successfully take it through the regulatory process to
    market. We received FDA approval for Vantas within
    10&nbsp;months of submitting our new drug application. In
    addition, over the past three years, we have advanced two other
    product candidates into late-stage clinical development. We
    expect to continue to utilize this capability to efficiently
    develop future products.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Manufacturing Ability.</I> We manufacture Vantas and our
    product candidates utilizing Hydron Technology using a patented
    process. In addition, we have developed proprietary equipment
    and scalable manufacturing methods to achieve cost-effective
    commercial production. Further, because we control the
    manufacture of Vantas and our product candidates, we can ensure
    high quality and fully realize manufacturing cost efficiencies.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Sales and Marketing.</I> We are currently calling on the
    urologists that account for the majority of LHRH agonist product
    sales in the U.S. By adjusting our current sales force structure
    slightly, we will be able to call on physicians in additional
    specialty areas, such as endocrinology. These therapeutic areas
    are attractive because a small, focused sales force can
    effectively target them. We also believe that the direct
    physician distribution channel of Vantas may present a barrier
    to the future entry of competition from generic products because
    generic drug companies do not typically have field sales forces.
    As part of our marketing strategy, we have entered into a
    strategic partnership with IUN, a group purchasing organization,
    for over 40% of all practicing urologists. Outside the U.S., we
    intend to</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">36

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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    partner with companies with a local presence and proven
    distribution channels in the urology market for distribution of
    Vantas.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Product Development</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes certain information regarding
Vantas and our product candidates:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="13%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="16%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="22%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="11" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Therapeutic</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Delivery</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Product</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Indication</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Area</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Method</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Status</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Next Anticipated Milestone</B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="11" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Vantas</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Prostate Cancer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Urology</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Implant</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Commercial Sales</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    European Regulatory Filing in First Half of 2005</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    VP002 (Histrelin)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Central Precocious Puberty</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Endocrinology</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Implant</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Phase&nbsp;III</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    New Drug Application Filing in First Half of 2006</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    VP003 (Octreotide)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Acromegaly</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Endocrinology</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Implant</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Phase&nbsp;I/II</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Phase&nbsp;IIb Clinical Trial in Second Half of 2005</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    VP004 (Naltrexone)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Addiction Disorders</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Central Nervous System</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Implant</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Pre-clinical</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Phase&nbsp;I/II Clinical Trial in First Half of 2006</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    VP005 (Anti- inflammatory)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Interstitial Cystitis</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Urology</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Bladder Instillation</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Pre-clinical</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Phase&nbsp;I/II Clinical Trial in First Half of 2006</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Vantas</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Vantas is an implant utilizing Hydron Technology to deliver
histrelin over a 12-month period for the palliative treatment of
advanced prostate cancer. The total number of patients with
advanced prostate cancer in the U.S.&nbsp;was 652,000 in 2004.
We estimate the patient population to be similar in Europe, and
we plan to file an application for regulatory approval in the
European Union in the first half of 2005. The current standard
of care for the palliative treatment of prostate cancer is LHRH
agonist therapy. An agonist is a chemical substance capable of
activating a receptor to induce a full or partial
pharmacological response. LHRH agonist therapies for advanced
prostate cancer are designed to suppress the production of
testosterone because testosterone promotes and accelerates the
growth of tumors associated with prostate cancer. Histrelin, a
powerful inhibitor of testosterone production, is the most
potent LHRH agonist available.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Total U.S.&nbsp;sales of LHRH agonist products for the
palliative treatment of prostate cancer were approximately
$974&nbsp;million in 2004 based on IMS Health market data. The
most common dosage forms for the administration of LHRH agonists
involve three- and four-month injection formulations such as
Lupron and Eligard, which deliver leuprolide, and Zoladex, a
biodegradable rod, which delivers goserelin. Another product is
Viadur, a rigid metal implant that releases leuprolide over a
12-month period. We believe that Vantas is a more comfortable
and convenient alternative to competing products because it
eliminates the requirement of multiple physician visits and
repeated injections and is smaller, softer and more flexible
than other implants. In addition, in our Phase&nbsp;III clinical
trial for Vantas, 100% of the evaluable patients achieved
chemical castration at week four and testosterone suppression
was maintained throughout the 52-week study period for 99% of
the patients. Based on these data, we believe Vantas is a highly
effective product for the palliative treatment of advanced
prostate cancer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prostate cancer is the most common cancer for men and the second
leading cause of cancer death in men. According to the American
Cancer Society, every year approximately 200,000 men are
diagnosed with
</DIV>

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<DIV align="left" style="font-size: 10pt;">
prostate cancer and 40,000 die from this disease. The National
Cancer Institute&#146;s SEER Program and the National Oncology
Database each project that this patient group will grow at an
annual rate of 2-3%&nbsp;per year through 2008 and beyond.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are currently selling and marketing Vantas through our sales
force to the urologists that account for the majority of LHRH
agonist product sales in the U.S.&nbsp;Our product specialists
utilize various promotional materials when making clinical
presentations, including instructional videos on proper
implantation technique. In remote areas where our product
specialists cannot make personal visits, we conduct direct mail
programs and telemarketing campaigns to selected physicians. We
may also supply physicians, health plan administrators and
specialty pharmacies with a pharmaco-economic model to
demonstrate the cost effectiveness of Vantas compared to other
LHRH agonist products due to decreased utilization of staff time
for repeated injections and a single reimbursement claim per
year as opposed to three or four. Additionally, we support our
sales efforts by employing a wide range of marketing programs to
promote Vantas, including journal advertising, industry
publications, medical educational conferences and internet
initiatives.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>VP002 (Histrelin)</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
VP002 is an implant utilizing Hydron Technology to deliver
histrelin over a 12-month period for the treatment of central
precocious puberty, or CPP. The prevalence of this condition is
estimated to be between one in 5,000 to 10,000 children. This
yields a potential population of up to 11,700 children with this
condition who are 14 or younger in the U.S.&nbsp;CPP is the
early onset of puberty in young children, resulting in the
development of secondary sexual characteristics and short
stature, if left untreated. The development of these secondary
sexual characteristics is due to an increase in the secretion of
sex hormones, the cause of which is unknown. The standard of
care of CPP involves the use of LHRH agonists to suppress the
secretion of sex hormones in order to delay the onset of puberty.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The only therapy currently marketed to treat CPP is Lupron
Depot-PED, which is manufactured and marketed by TAP
Pharmaceutical Products, Inc. According to IMS Health market
data, Lupron Depot-PED generated revenues in excess of
$71&nbsp;million in the U.S.&nbsp;in 2004. CPP treatment using
Lupron Depot-PED consists of monthly intramuscular injections of
leuprolide to hormonally suppress these children. Our research
indicates that, in many cases, hormonal suppression may not be
achieved by a monthly injection schedule, and leuprolide needs
to be administered more frequently. VP002 delivers histrelin,
which has 10 times the relative potency of leuprolide, and which
has been previously approved for this condition as a daily
injection for children. VP002 is formulated to release a higher
daily dose of histrelin than Vantas because children with CPP
need higher doses of LHRH agonist to achieve hormonal
suppression. If approved, VP002 would provide hormonal
suppression over a 12-month period. We believe VP002 would have
a competitive advantage over existing products because it
eliminates the monthly injections given to these children and
offers increased convenience and reduced costs by eliminating
the need for monthly physician visits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In a survey conducted by D2 Market Research at the 2004
Pediatric Academic Society conference, over 50% of the pediatric
endocrinologists who completed a self-administered questionnaire
indicated they would be likely to use a one-year implant like
VP002. There are approximately 700 pediatric endocrinologists in
the U.S., and most of them are located in the same major
metropolitan areas as the urologists we are calling on for
Vantas. We intend to market VP002, if approved, by leveraging
our existing sales force and hiring only a small number of
additional product specialists.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Results from our Phase&nbsp;II clinical trial of VP002 showed
that all patients were hormonally suppressed for the entire
12-month period. As demonstrated by blood tests, the primary
efficacy endpoints of our Phase&nbsp;II clinical trial were the
suppression of testosterone in boys and estradiol in girls.
Based on the successful outcome of our Phase&nbsp;II clinical
trials, we are currently conducting a single Phase&nbsp;III
clinical trial with 36&nbsp;patients. Because the patient
population for CPP is small, clinical studies with smaller
sample sizes are permitted by the FDA. The endpoints of this
clinical trial, as agreed with the FDA, will be the suppression
of luteinizing hormone upon a gonadotropin releasing hormone
challenge. We completed enrollment of patients in our
Phase&nbsp;III clinical trial in March 2005 and plan on filing a
new drug application with the FDA in the first half of 2006.
</DIV>

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<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>VP003 (Octreotide)</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
VP003 is an implant utilizing Hydron Technology to deliver
octreotide over a six-month period for the treatment of
acromegaly. We believe there are approximately 1,000 new
acromegalic patients per year in the U.S. and 16,000 total
patients. Acromegaly is a chronic hormonal disorder that occurs
when a pituitary tumor produces excess growth hormone, or GH. It
most commonly affects middle-aged adults, and if untreated,
causes enlargement of certain bones, cartilage, muscles, organs
and other tissue, leading to serious illness and potential
premature death.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Octreotide is a treatment used to substantially reduce GH levels
and insulin-like growth factor levels, or IGF-1 levels, in
patients with acromegaly. Octreotide is also approved to treat
the symptoms associated with metastatic carcinoid tumors and
vasoactive intestinal peptide secreting adenomas, which are
gastrointestinal tumors. Octreotide is currently being marketed
by Novartis as Sandostatin injections in several strengths in
both daily and monthly formulations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Worldwide sales of Sandostatin generated revenues in excess of
$827&nbsp;million in 2004 according to Scrip World
Pharmaceuticals News. We estimate the U.S.&nbsp;acromegalic
market, with an estimated 16,000 acromegalics, to be
approximately $160&nbsp;million annually, consisting mostly of
monthly injections. We believe there is a market for a
longer-acting octreotide formulation such as VP003 in order to
reduce the number of physician visits for injections of
octreotide. In addition, since there are a limited number of
endocrinologists dispensing octreotide and patients are
dispersed throughout the country, we believe patient compliance
would also be significantly improved by longer-acting treatment
with VP003.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Research conducted by D2 Market Research shows that a
longer-acting octreotide product would be favorably received in
the endocrinology market. The endocrinologists interviewed by D2
cited the poor compliance of acromegalics who are required to
visit a doctor every month to get injections for a disease in
which patients rarely notice the changes being caused by the
condition. Another reason cited for poor compliance was the long
distances many patients have to travel for treatment because of
the limited number of physicians willing to administer the
monthly formulation of Sandostatin due to the complexity of the
technique involved.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
There are about 4,400 endocrinologists practicing in the U.S.,
and most of them are located in the same metropolitan areas
where we are marketing Vantas to urologists. We intend to market
VP003 by leveraging our existing sales force and hiring only a
small number of additional product specialists. Furthermore, we
may already have a presence with endocrinologists to market
VP003, if approved, as a result of the potential marketing of
VP002, our histrelin implant to treat CPP.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2004, we initiated and completed a Phase&nbsp;I/ II
pharmacokinetic clinical trial with 11 acromegalic patients to
evaluate the release characteristics of VP003 and examine safety
and efficacy parameters. The endpoints of this clinical trial
were the reductions in GH and IGF-1 levels in the blood in these
patients. We plan to initiate a Phase&nbsp;IIb clinical trial to
evaluate the efficacy of VP003 as compared to the monthly
formulation of Sandostatin in the second half of 2005. The
endpoints of our Phase&nbsp;IIb clinical trial will be the
reductions in GH and IGF-1 levels in the blood in these
patients, which were the endpoints in the Phase&nbsp;III
clinical trial of Sandostatin.
</DIV>

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<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>VP004 (Naltrexone)</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
VP004 is an implant utilizing Hydron Technology to deliver
naltrexone for the treatment of opioid addiction over a
six-month period. The National Institute for Drug Addiction
estimates that there are approximately one million heroin
addicts in the U.S.&nbsp;of which only 25% seek treatment.
Naltrexone is an opiate antagonist currently approved as an oral
daily formulation in the U.S.&nbsp;for the treatment of opiate
dependence. Naltrexone competitively binds at the opiate
receptor sites in the brain, thereby blocking the euphoric
effects of opiates such as heroin.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Although naltrexone is effective, the addict population is
typically non-compliant. We believe that this creates an
attractive opportunity for VP004 because it provides controlled
release of naltrexone over a six-month period. There are 214
registered addiction medicine specialists practicing in the
U.S.&nbsp;Further, a
</DIV>

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significant number of primary care providers treat opioid
addicts. In addition to opioid addiction, naltrexone is also
currently approved in the U.S.&nbsp;for the treatment of
alcoholism.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
VP004 is presently undergoing animal testing for evaluation of
safety and pharmacokinetics. Upon successful completion of these
tests, we intend to file an investigational new drug application
and initiate a pilot Phase&nbsp;I/ II clinical trial among an
opioid addict population in the first half of 2006. While we are
currently developing VP004 for the treatment of opioid
addiction, we may decide in the future to pursue an indication
for the treatment of alcoholism as well. We plan to license the
rights to use VP004 to an addiction specialty firm prior to
conducting Phase&nbsp;III clinical trials.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>VP005
(Anti-inflammatory)</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
VP005 is a proprietary polymer solution instillation for the
treatment of symptoms associated with interstitial cystitis, a
chronic inflammatory condition of the bladder. Interstitial
cystitis, or IC, affects approximately one million people in the
U.S.&nbsp;IC is characterized by frequent urination and pain
above the pubic region. The cause of IC is unknown but is
believed to involve inflammation of the lining of the bladder.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that IC is a disease that has been poorly served by
the pharmaceutical industry. Elmiron is the only product
currently approved for the relief of bladder pain or discomfort
associated with IC. Elmiron is manufactured and marketed by
Ortho-McNeil Pharmaceutical, Inc. and is an oral formulation
containing 100 milligrams of pentosan polysulfate sodium, a
semi-synthetic molecule that is taken three times a day.
According to IMS Health market data, Elmiron generated revenues
in excess of $100&nbsp;million in the U.S.&nbsp;in 2004. Our
discussions with urologists indicate that Elmiron is only
occasionally effective and that many patients require
instillation therapy, a more invasive form of treatment
utilizing a catheter to fill up the bladder with various
solutions. Instillation therapy has been shown to abate the
symptoms of IC in some patients. VP005 is an instillation
therapy that forms a temporary coating on the internal lining of
the bladder and facilitates the slow, controlled release of the
drug in VP005 into the bladder. We intend to license the drug
delivery technology used in VP005 and intend to apply for patent
protection for this application of that technology.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
VP005 has been successful in animal models in treating what we
believe to be the major contributing factor in producing the
painful symptoms of IC. We have drafted a Phase&nbsp;I/II
protocol to evaluate VP005 in humans. We are planning a meeting
in March 2005 with a panel of IC experts from the U.S. to help
refine the protocol and conduct clinical trials. We expect to
file an investigational new drug application with the FDA and
initiate a Phase&nbsp;I/II trial in the first half of 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Drug Delivery System</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Human implantable drug delivery is a relatively new therapeutic
drug delivery approach in which drugs are administered directly
into the circulatory system through a biocompatible, non-toxic
device. We believe this type of drug delivery is suitable for
certain drugs that are not amenable to oral delivery, such as
therapeutic peptides that are destroyed in the gastrointestinal
tract, or GI tract, or drugs poorly absorbed by the GI tract or
destroyed in the liver. In such cases, increasing the dosage of
these drugs to increase absorption may result in harmful side
effects. As a result, we believe that implantable drug delivery
systems may provide safer and more effective administration of
therapy by delivering the drug directly to the bloodstream at
even, predetermined rates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Hydron Technology, our proprietary drug delivery technology, is
the basis of our patented hydrogel implant, which is inserted
under a patient&#146;s skin. This technology, which evolved from
similar technology used in soft contact lenses, is flexible and
can be adapted to deliver many types of drugs. The implant is
designed to allow release of drugs continuously, at even,
controlled rates for up to a 12-month period. We believe that
such predictable release over a period of 12&nbsp;months has not
been achieved by most other drug delivery systems, including
sustained release injections, bioerodible implants and
transdermal devices. In addition, implants utilizing Hydron
Technology are smaller, softer and more flexible than other
implants and eliminate the requirement of multiple physician
visits and repeated injections. Utilizing Hydron Technology, we
are able to manufacture implants to the exact chemical and
physical specifications required by the particular drugs to
</DIV>

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<DIV align="left" style="font-size: 10pt;">
be released. By modifying the geometric characteristics (wall
thickness, diameter and length) and the polymer make-up of the
implants, we can vary the release rates of a broad spectrum of
drugs according to the therapeutic levels required. Once filled
with an active ingredient, sealed and sterilized, the implant is
inserted into a patient in a minor outpatient procedure
generally performed in a physician&#146;s office. If necessary,
the physician can easily remove the implant from the body in a
similar procedure. We believe that advantages of our Hydron
Technology include:
</DIV>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Increased Patient Compliance.</I> Hydron Technology releases
    drugs for up to a 12-month period. As a result, the need for
    multiple physician visits and the inconvenience associated with
    frequent injections are eliminated, reducing the risk that a
    patient will miss a treatment.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Adaptability.</I> Hydron Technology can be adapted to deliver
    many types of drugs. In addition, it provides a controlled and
    even drug release over a period of time that can result in
    increased efficacy and safety.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Decreased Cost.</I> As a result of the reduced number of
    patient visits to doctors&#146; offices, the overall costs
    associated with such visits, including scheduling, office visit
    and reimbursement claim costs, are significantly lowered. In
    addition, use of Hydron Technology lessens the administrative
    burden on private insurance and Medicare by reducing the number
    of reimbursement claims processed per year.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Finally, since Vantas is based on Hydron Technology, we believe
that the regulatory approval of Vantas may be helpful in
obtaining approval of our product candidates that utilize this
technology.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Our Business Strategy</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to increasing sales of our approved product, Vantas,
our goal is to develop and commercialize products for the
treatment of urological and endocrine conditions, diseases and
disorders. To achieve this goal, our strategy includes the
following key elements:
</DIV>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Continue to Focus on Urological and Endocrine Conditions,
    Diseases and Disorders.</I> We intend to continue to focus on
    the development and commercialization of products for the
    treatment of urological and endocrine conditions, diseases and
    disorders. Our aim is to build our urological and endocrine
    product portfolio and opportunistically acquire or in-license
    later-stage urological and endocrine products that are currently
    on the market or require minimal development expenditures, or
    have some patent protection or potential for market exclusivity
    or product differentiation. We intend to collaborate with major
    and specialty pharmaceutical companies to develop and
    commercialize products that are outside of our core urology and
    endocrinology focus.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Develop Proprietary Pharmaceutical Portfolio.</I> We are
    building a product portfolio based on Hydron Technology. We have
    demonstrated the utility of Hydron Technology through Vantas and
    we believe that we can utilize this technology to bring
    additional products to market. We intend to apply Hydron
    Technology to the delivery of drugs with established safety and
    efficacy profiles to reduce product development risk and speed
    time to market.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Develop or Acquire New Drug Delivery Technologies.</I> In
    addition to Hydron Technology, we intend to continue to evaluate
    other drug delivery technologies as candidates for in-license,
    acquisition and development, including various implantable
    technologies and other drug delivery systems. We believe that,
    by devoting our resources to continued development of new drug
    delivery technologies, we can develop a broader base that will
    enable us to deliver a greater variety of drugs than would be
    possible using a single drug delivery technology.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Leverage Sales and Marketing Expertise.</I> We will continue
    to expand our commercialization efforts by leveraging our
    existing sales and marketing expertise to market new products as
    they are approved. We intend to expand our sales force,
    currently consisting of approximately 40 employees,
    incrementally in a cost-effective manner and expand or realign
    territories as products emerge from our development pipeline or
    are acquired.</TD>
</TR>

</TABLE>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Partner Outside the U.S. to Reach New Geographic Markets.</I>
    To reach markets outside the U.S., we intend to pursue primarily
    a licensing strategy, whereby we partner with companies with a
    local presence and proven distribution channels in the urology
    and endocrinology markets for distribution of our products. We
    may retain co-marketing rights, however, on a select
    territory-by-territory basis to further leverage our sales and
    marketing expertise.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Sales and Marketing and Distribution</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our sales force consists of approximately 40 employees. Our
product specialists have an average of seven years of
pharmaceutical sales experience and the majority of our sales
force have sold other LHRH agonist products prior to joining us.
At present, we are calling on the urologists that account for
the majority of LHRH agonist products in the U.S. As revenue
increases and resources become available, we intend to scale up
our sales force. We continue to analyze physician prescribing
habits so that we can direct our product specialists to
physicians who maintain the largest prostate cancer practices.
We will also evaluate the need to hire additional product
specialists as we get closer to acquiring a new product or
launching VP002, our histrelin implant for CPP. By adjusting our
current sales force structure slightly, we will be able to call
on our current physician base and on physicians in additional
specialty areas, such as endocrinology. Further, we believe that
the direct physician distribution channel of Vantas may present
a barrier to the future entry of competition from generic
products because generic drug companies do not typically have a
field sales force.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our product specialists utilize various promotional materials
when making clinical presentations, including, instructional
videos on proper implantation technique. In remote areas where
our product specialists cannot productively make personal
visits, we conduct direct mail programs and telemarketing
campaigns. We also supply physicians, health plan administrators
and specialty pharmacies with a pharmaco-economic model to
demonstrate the cost effectiveness of Vantas compared to LHRH
agonist products due to decreased utilization of staff time for
repeated injections and one reimbursement claim per patient per
year as opposed to three or four.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Additionally, we support sales efforts by employing a wide range
of marketing programs to promote Vantas, including journal
advertising, industry publications, medical educational
conferences and internet initiatives. We will hold meetings in
major cities where a Vantas clinical investigator presents data
about Vantas, relates his own impressions and demonstrates
proper implantation technique. In addition, our product
specialists plan to utilize local thought leaders as peer
influence speakers in their specific markets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As part of our marketing strategy, we have entered into a group
purchasing agreement with IUN, a subsidiary of AmerisourceBergen
Corporation. IUN was founded in 2001 as a GPO for over 40% of
all practicing urologists. This network designs and supports
practice management, business planning and accredited continuing
medical education for all of its members. Our agreement with IUN
includes access to their physician members, support from their
strategic account managers and services from two other
AmerisourceBergen subsidiaries: US Bioservices Corporation, a
specialty pharmacy, and Besse Medical Supply, a wholesale
distributor for many GPOs, including IUN. Under the agreement,
physician practices and clients who are members of IUN or US
Bioservices are eligible to purchase Vantas directly from Besse
Medical. In addition, US Bioservices can dispense Vantas
purchased under the agreement to patients of member physicians
upon request by healthcare providers, patients, or third party
payors, as well as provide drug management and patient care
support services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
IUN will inform its members about the terms of the purchasing
arrangements, as well as provide them with appropriate clinical
and scientific information about Vantas. If certain sales
targets are achieved, IUN will provide additional educational
services to its members with respect to Vantas. In addition, IUN
will supply us with member information, including authorized
specialty distributors and wholesalers of the members.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Outside the U.S., we intend to primarily pursue a licensing
strategy, whereby we partner with companies with a local
presence and proven distribution channels in the urology market
for distribution of Vantas. We may retain co-marketing rights,
however, on a select territory-by-territory, basis. For example,
we have executed an agreement with Paladin Labs, Inc., a
Canadian company, under which it will distribute Vantas
</DIV>

<P align="center" style="font-size: 10pt;">42

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<DIV align="left" style="font-size: 10pt;">
and file all required regulatory applications in Canada, and
have signed a similar agreements with Key Oncologics
(Pty)&nbsp;Ltd., a South African company, and BioPro
Pharmaceutical, Inc., a marketing organization specializing in
oncology drugs in the pan Asian region. We are actively seeking
relationships or distribution arrangements with additional GPOs,
specialty pharmacies and local companies abroad.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Reimbursement</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Advanced prostate cancer is generally treated by urologists in
their offices. LHRH agonist products are sold directly from the
pharmaceutical manufacturer to the physician and are
administered in the office through injections or a 12-month
implant. Once a physician acquires and administers the LHRH
agonist product, he files a claim with Medicare or the
patient&#146;s private insurance for reimbursement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Approximately 70% of patients diagnosed with prostate cancer and
receiving LHRH agonist therapy are over the age of 65 and
therefore covered by Medicare. In light of this, we have
retained a group of Medicare experts to monitor pricing of LHRH
agonist products and Medicare reimbursement environment.
Medicare reimbursement for LHRH agonist therapy is in two parts.
The first part of the reimbursement is based on the
manufacturers&#146; average sales price, or ASP. This method was
introduced in 2005. Under the ASP method, each LHRH agonist
product manufacturer must calculate a quarterly average unit
sales price and report it to the Centers for Medicare and
Medicaid Services (CMS). CMS will then post the ASP on their web
page for the physicians to reference. A physician will be
reimbursed by Medicare at 106% of the ASP. The second part of
the reimbursement is derived from the actual procedure the
physician completes to administer the LHRH agonist product. A
physician can expect to receive approximately $125 for an
implant procedure, such as Vantas, as compared to $28 for an
injection procedure.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Reimbursement is often confusing and requires exacting
procedures in order to be honored by Medicare or private
insurance carriers. As a result, we have set up a toll-free
phone number for physicians to call for help in resolving any
billing issues concerning reimbursement for Vantas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Intellectual Property</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our success will depend in large part on our ability to maintain
a proprietary position in our products and product candidates
through patents, trade secrets and FDA exclusivity. We rely upon
patents, trade secrets, know-how and continuing technological
innovation to develop and maintain our competitive position. We
plan to aggressively protect and defend our proprietary position.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of February 2005, we own three issued U.S.&nbsp;patents and
24 issued foreign patents relating to our Hydron Technology. We
own five pending foreign patent applications relating to our
Hydron Technology. Our patents and patent applications cover a
variety of novel pharmaceutical formulations, methods of use,
and processes to manufacture hydrogel polymers and implants
incorporating active agents. Within the Hydron Technology patent
portfolio, we own two issued U.S.&nbsp;patents and 24 issued
foreign patents relating to Vantas. We own one pending foreign
patent application relating to Vantas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth information related to U.S. and
foreign patents and patent applications owned by us:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="23%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="11">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Date of</B></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No. of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No. of Pending</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Grant/</B></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Technology Family</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Brief Description of Coverage</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Patents</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Applications</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Expiration</B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Water-Swellable Hydrophilic Articles</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Method of preparing a hydrophilic plastic cartridge</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    1994/2011</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    Homogenous Hydrogel Copolymers</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Method of preparing homogeneous copolymers having a
    predetermined equilibrium water content value</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    1993/2010</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">43

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<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; ">

<TR style="font-size: 1pt;">
    <TD width="23%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="11">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Date of</B></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No. of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No. of Pending</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Grant/</B></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Technology Family</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Brief Description of Coverage</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Patents</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Applications</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Expiration</B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Hydrogel Composition</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Method of preparing homogenous porous hydrogel</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    2002/2020</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    Implanting Device</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Device for inserting implantable objects under the skin</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Not Applicable/ 2023</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    Implanting Device Design</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Design for an implanting device</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    2004/2017</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    Compositions and Treatments for Central Precocious Puberty</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Controlled delivery of gonadotropin- release hormone agonists
    for the treatment of central precocious puberty</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Not Applicable/ 2025</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    Polyurethane Implant Formulations</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Polyurethane implant formulations and methods of preparing</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Not Applicable/ 2024</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    Total</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>29</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have filed U.S. and foreign patent applications covering
pharmaceutical formulations, processes and methods of use
relating to VP002 (histrelin) for CPP. In addition, as of
February 2005, we also own three other issued patents and have
approximately five other patent applications pending worldwide
relating to other areas, including implanting devices and
designs thereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our commercial success will depend in part on obtaining this
patent protection. Other intellectual property and know-how,
including the Hydron Technology, that we have produced and own,
are safeguarded through copyrights, trademarks, trade secret
protections and contractual safeguards such as confidentiality
and proprietary information agreements. The development of our
technology and many of our processes are dependent upon the
knowledge, experience and skills of key scientific and technical
personnel. To protect our rights to this proprietary information
and technology, which are not patentable, we require all
employees, consultants and advisors to enter into
confidentiality agreements that prohibit the disclosure of
confidential information to anyone outside our company. As a
matter of company policy, all scientific employees are
&#147;hired to invent&#148; and all have executed agreements
that recognize this policy and generally require disclosure and
assignment to us of ideas, developments, discoveries and
inventions made by employees. However, these agreements may not
effectively prevent disclosure of our confidential information
or provide meaningful protection for our confidential
information if there is unauthorized use or disclosure.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Material Agreements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are a party to certain material agreements including:
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>GP Strategies Corporation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In June 2000, we entered into a contribution agreement with GP
Strategies Corporation, our former parent. Under this
contribution agreement, GP Strategies contributed, assigned,
transferred and conveyed to us the assets of GP Strategies&#146;
drug delivery business, including all intellectual property and
certain agreements with Hydron Technologies, Inc., formerly
known as Dento-Med Industries, Inc., The Population Council,
Inc., and Shire US Inc., successor to Roberts Laboratories Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We assumed all assets, liabilities and obligations of GP
Strategies relating or arising from the operation of the drug
delivery business and the assets.
</DIV>

<P align="center" style="font-size: 10pt;">44

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<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Hydron Technologies, Inc.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In November 1989, National Patent Development Corporation
entered into an agreement with Dento-Med Industries, Inc., now
known as Hydron Technologies. Under the contribution agreement
in June 2000 between us and GP Strategies, GP Strategies
transferred its rights and obligations under the agreement with
Hydron Technologies to us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the agreement, Hydron Technologies was granted an
exclusive, worldwide license, with the right to grant
sublicenses, in and to presently owned or subsequently issued
patents and the Hydron trademark, to manufacture, market or use
products composed of the Hydron polymer or produced with the use
of the Hydron polymer in certain consumer and oral health
fields, excluding prescription and non-prescription drugs. The
agreement purports to continue indefinitely, unless terminated
earlier by the parties. We have the exclusive right to
manufacture, sell or distribute any prescription drug or medical
device as defined under the Federal Food, Drug and Cosmetic Act
made with the Hydron polymer, however, we will not have the
right to sell or distribute any Hydron polymer product in the
oral health field, except for prescription drug products for lip
sores and oral ulcers. We also have the exclusive right to
manufacture, sell or distribute certain other excepted Hydron
products from Hydron Technologies&#146; license. Neither party
is prohibited from manufacturing, exploiting, using or
transferring the rights to any new non-prescription drug product
containing the Hydron polymer, subject to certain exceptions,
for limited exclusivity periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the event we withdraw from the business of manufacturing the
Hydron polymer, we shall assign all of our right and interest in
the Hydron trademark to Hydron Technologies. Upon request from
Hydron Technologies, we may provide certain research services,
including limited use of our facilities, for Hydron
Technologies&#146; research activities, for which we will be
reimbursed a specified amount. In addition, subject to certain
conditions and exceptions, Hydron Technologies has the right to
purchase from us and we are obligated to supply to Hydron
Technologies certain types of Hydron polymers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subject to certain exceptions (including Vantas), each party
will pay to the other a 5% royalty on net sales for Hydron
polymer products marketed by us or Hydron Technology, as
applicable, or a third party. Subject to certain excepted Hydron
polymer products, in the event either party sells any
non-prescription Hydron polymer drug products itself, such party
will pay a 5% royalty fee on net sales, including research
payments, to the other party. Subject to certain Hydron polymer
excepted products, if either party sells non-prescription drug
products to a third party and receives up-front license fees,
royalties or similar payments, such party will pay a 25% royalty
on such payments to the other.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The Population Council</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In September&nbsp;1990, National Patent Development Corporation
entered into a joint development agreement with The Population
Council regarding the development of hydrogel implants
containing LHRH. Under the contribution agreement entered into
in June&nbsp;2000 between us and GP&nbsp;Strategies,
GP&nbsp;Strategies transferred its rights and obligations under
the agreement with The Population Council to us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
By amendment to the agreement dated October&nbsp;1, 1997, the
Joint Development Agreement was terminated in its entirety and
superseded by the terms and conditions of the amendment. Under
the amendment, The Population Council concluded all ongoing
prostate cancer clinical studies and provided us with all data
and records relating to those trials to enable us to advance the
clinical trials and seek regulatory approval to commercially
develop and market any polymer implant containing any LHRH
analog or any polymer implant containing any other active agent,
other than an LHRH analog. We can enter into licensing and
marketing agreements for the commercial development of those
implants without the consent of The Population Council. The term
of the agreement is the shorter of twenty five years from the
date of the amendment or until the date on which The Population
Council receives approximately $40,000,000 in payments from us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
By a further amendment to the agreement dated August 2004, The
Population Council is entitled to 30% of certain revenues
received by us from the licensing of Vantas or any other polymer
implant containing an LHRH analog and 5% of certain revenues
received by us from the licensing of any other polymer implant to
</DIV>

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<DIV align="left" style="font-size: 10pt;">
the extent those revenues are related to the use or sale of
implants in all areas other than the European Union and certain
Southeast Asian countries. We are required to pay to The
Population Council 3% of our net sales of Vantas and any polymer
implant containing an LHRH analog and 0.5% of our net sales of
any other polymer implant. The Population Council is also
entitled to 4% of any licensee&#146;s net sales of Vantas and
any other polymer implant containing an LHRH analog within the
European Union and certain Southeast Asian countries and 0.667%
of any licensee&#146;s net sales for any other polymer implant
within the European Union and certain Southeast Asian countries.
In addition, we are required to establish a patient assistance
program within one year after the first commercial sale of
Vantas in the U.S. and maintain the program for a period ending
on the earlier of ten years after establishment of the program
or the cessation of the marketing of Vantas.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Shire Pharmaceuticals Group plc</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In March&nbsp;1998, GP Strategies entered into a license
agreement and a related manufacturing and supply agreement with
Roberts Laboratories Inc. under which Roberts was responsible
for conducting Phase&nbsp;III clinical trials, managing the
regulatory approval process and marketing the product now known
as Vantas. When Roberts was acquired by Shire Pharmaceuticals
Group in December&nbsp;1999, Shire took over the development of
Vantas. In December&nbsp;2001, we entered into a termination,
license back and option agreement with Shire&nbsp;US, a
subsidiary of Shire Pharmaceuticals Group, which terminated and
released all claims of the parties under the previous license
and manufacturing agreements. Under this agreement, Shire
transferred to us all on-going activities under the development
program for Vantas, including all data, know-how and other
information with respect to Vantas generated in connection with
the development program, and granted us an exclusive license to
such data, know-how and information for the development,
manufacture, use, supply and sale of Vantas in the designated
territory, including, but not limited to, the U.S., Canada, and
various European and other countries. We must use our reasonable
efforts to secure a sublicense for the purposes of developing
and commercializing Vantas, however, we may market Vantas in the
U.S.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The term of the license continues for ten years from the date of
the first commercial sale of Vantas. Thereafter, we will have a
fully paid up license in the designated territory with respect
to all data, know-how and other information related to Vantas
generated under Shire&#146;s previous development program for
Vantas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are required to pay Shire 2% of net sales of Vantas in the
designated territory. However, for the purposes of this
agreement, net sales are reduced by the amount of any royalty
payments we make to the Population Council with respect to sales
of Vantas. If we sublicense Vantas to another entity in the
designated territory, we will pay Shire fees of 20% of royalty
income and 20% of any milestone payments we receive, up to a
maximum of $5,000,000, relating to any sublicensing of Vantas.
Royalty income does not include amounts paid to The Population
Council with respect to sales of Vantas by a sublicensee.
However, the $5,000,000 cap on our royalties payments with
respect to milestone payments is only applicable if we are
entitled to receive at least 10% of net sales under the
sublicense agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We also granted Shire an exclusive, irrevocable option, on a
country-by-country basis in the designated territory, to
exclusively market and distribute Vantas in each country of the
designated territory, other than in the U.S.&nbsp;This option,
with respect to each country, will expire on the earlier of the
date we enter into a sublicense agreement for that particular
country or 180&nbsp;days following the date of regulatory
approval in that particular country for Vantas. We may market
Vantas in any country at the expiration of the option with
respect to that country. Upon exercise of the option, with
respect to a particular county, Shire is obligated to pay us
milestone payments of $2,000,000 in respect of the European
Union and $500,000 in respect of any other countries within the
designated territory. This amount will be reduced by $250,000 if
we enter into a sublicense agreement within the European Union.
These milestone payments are payable with respect to a
particular country when Vantas is approved for marketing in the
applicable country. If Shire exercises the option with respect
to a particular country, we will supply Vantas at the cost of
manufacture. Shire will pay us 13.5% of its net sales within the
option territory. Each marketing and distribution arrangement
requested by Shire under its option will have a term of
10&nbsp;years.
</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Paladin Labs, Inc.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In October&nbsp;2002, we entered into a license and distribution
agreement with Paladin Labs under which we granted Paladin Labs
an exclusive, royalty bearing license under our intellectual
property, including our patents, trademarks and know-how, to
seek regulatory approval for the marketing, distribution and
sale in Canada and its territories of (i)&nbsp;Vantas for the
treatment of prostate cancer and (ii)&nbsp;any other Hydron
histrelin implant, which is, or may be, developed by us for
other indications. Paladin Labs also has the exclusive right to
market, distribute and sell in Canada and its territories,
Vantas and any other Hydron histrelin implant for any such
indication. Paladin Labs is obligated to use commercially
reasonable efforts to apply for and maintain regulatory approval
for Vantas and any other Hydron histrelin implant and to sell,
market and distribute those implants in Canada and its
territories. The initial term of the agreement is for fifteen
years after the date on which regulatory approval for Vantas in
Canada is obtained for the treatment of advanced prostate cancer
and will automatically renew for subsequent three year terms,
unless terminated earlier. We also granted Paladin Labs an
exclusive license to use the trademarks owned by us, including
all trademarks and trade names approved by us, in connection
with the marketing, distribution and sale of Vantas or any other
Hydron histrelin implant in the designated territory. We have
given Paladin Labs the exclusive right, but not the obligation,
to conduct Phase&nbsp;IV clinical trials relating to the use of
Vantas for the treatment of prostate cancer in the designated
territory. If Paladin Labs does not conduct such trials within
one year of our request to do so, we will have the right to
conduct such Phase&nbsp;IV clinical trials on our own.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have the sole right and responsibility for the manufacturing,
assembling, packaging and labeling of Vantas or any other Hydron
histrelin implant in such quantities required for Paladin
Labs&#146; demand forecast and we must use all reasonable
efforts to supply those products. In addition, Paladin granted
us a non-exclusive license to use its trademarks on labeling of
Vantas or any other Hydron histrelin implant. We have agreed not
to supply Vantas or any other Hydron histrelin implant for
distribution or sale in Canada and its territories for use in
any indication to any other party except Paladin Labs. Paladin
Labs will pay us a flat transfer fee of $190&nbsp;per unit and a
royalty of 8% of its net sales of Vantas or any other Hydron
histrelin implant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are obligated to use commercially reasonable efforts to
complete all necessary pre-clinical and clinical trials that are
required by the Therapeutic Products Directorate of Health
Canada, Canada&#146;s federal regulatory authority for
pharmaceutical drugs, for use of Vantas in the treatment of
prostate cancer in Canada. However, we are not required to
undertake any pre-clinical or clinical trials beyond those
activities conducted in the U.S. and Canada. If the Therapeutic
Products Directorate of Health Canada requires pre-clinical or
clinical activities beyond those activities currently being
undertaken by us at our own expense to obtain approval to sell
Vantas, we will pay the first $250,000 of such pre-clinical
and/or clinical activities and Paladin Labs shall pay all
amounts above $250,000.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the terms of the agreement, we and Paladin have agreed not
to develop, market, distribute or sell in Canada or its
territories any products that contain the same active ingredient
as that which is contained in Vantas, or any products similar to
or competitive with Vantas or any other Hydron histrelin implant
approved in Canada during the term of the agreement and for a
period of three years following the expiration or termination of
the agreement; provided that we are permitted to make, market,
distribute and sell Vantas in the designated territory for all
indications following the expiration or termination of the
agreement.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Key Oncologics (Pty)&nbsp;Ltd.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In September&nbsp;2003, we entered into a license and
distribution agreement with Key Oncologics, under which we
appointed Key Oncologics as the exclusive agent to apply for
regulatory approval for and distribute Vantas in South Africa
and its territories for use in the treatment of prostate cancer.
The initial term of the agreement is for five years after the
date on which regulatory approval for Vantas for the treatment
of prostate cancer is obtained in South Africa, subject to
automatic one year renewal periods unless terminated earlier.
Key Oncologics is obligated to use commercially reasonable
efforts to apply for and maintain regulatory approval in South
Africa for Vantas for use in the treatment of prostate cancer.
Key Oncologics is required to use its best efforts to market,
distribute and sell Vantas in South Africa.
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have agreed to supply Vantas, as well as containers for and
components of Vantas, to Key Oncologics exclusively in South
Africa. We are obligated to supply Key Oncologics with all data
and information in our possession or control as is necessary for
the purpose of obtaining regulatory approval of Vantas for use
in the treatment of prostate cancer in South Africa. We have
given Key Oncologics the exclusive right, but not the
obligation, to conduct Phase&nbsp;IV clinical trials relating to
the use of Vantas for the treatment of prostate cancer in the
designated territory. If Key Oncologics does not conduct such
trials within one year of our request to do so, we will have the
right to conduct such Phase&nbsp;IV clinical trials on our own.
We will receive a perpetual, fully-paid, royalty-free license to
use any data developed by Key Oncologics in the Phase&nbsp;IV
trials.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the terms of the agreement, Key Oncologics has agreed not
to develop, market, distribute or sell in South Africa any
products that contain the same active ingredient contained in
Vantas, or any products similar to or competitive with Vantas
that are used to treat prostate cancer during the term of the
agreement and for a period of three years following the
expiration or termination of the agreement, except that Key
Oncologics may market, distribute and sell a certain product
under a previous third party license agreement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have granted Key Oncologics an exclusive license to use our
trademarks owned by us, including all trademarks and trade names
approved by us, in connection with the marketing, distribution
and sale of Vantas in South Africa in connection with the
treatment of prostate cancer. Key Oncologics has granted us a
non-exclusive license to use Key Oncologics&#146; trademarks on
labeling of Vantas. We have the sole right and responsibility
for manufacturing, assembling, packaging and labeling Vantas and
we are required to supply Vantas in sufficient quantities to
meet Key Oncologics&#146; demand forecast. We have agreed not to
supply Vantas for distribution or sale in any of the designated
countries for use in the treatment of prostate cancer to any
other party except Key Oncologics. For a period of twelve months
following the receipt of regulatory approval, Key Oncologics
will pay us a flat transfer fee of $250&nbsp;per unit of Vantas,
plus 10% of the net sales collected by Key Oncologics. After the
end of the first twelve-month period, we will have the right to
adjust the price per unit once per year, subject to certain
exceptions.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>International Urology Network</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In November 2004, to supplement our own marketing and
distribution efforts, we entered into two group purchasing
agreements with the group purchasing organization, IUN, to make
Vantas available for purchase to members of IUN with respect to
facilities located in the U.S. One of the agreements was entered
into by IUN on behalf of U.S.&nbsp;Urology. The term of the
agreements is for one year, commencing on December&nbsp;1, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the agreements, physician practices and clients who are
members of IUN or US&nbsp;Bioservices, Inc. a specialty
pharmacy, are eligible to purchase Vantas directly from Besse
Medical, IUN&#146;s wholesale distributor. In addition,
US&nbsp;Bioservices can dispense Vantas purchased under the
agreements to patients of member physicians upon request by
healthcare providers, patients, or third party payors, as well
as provide drug management and patient care support services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
IUN will inform its members about the terms of the purchasing
arrangements, as well as provide them with appropriate clinical
and scientific information about Vantas. If certain sales
targets are achieved, IUN will provide additional educational
services to its members with respect to Vantas. In addition, IUN
will supply us with member information, including a list of all
member and authorized specialty distributors and wholesalers of
the members.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the agreements, we are required to pay IUN a fee equal to
2.5% of the sales of Vantas through Besse Medical, as well as
administrative fees equal to 4% of the aggregate charge back
sales of Vantas to eligible members.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>BioPro Pharmaceutical, Inc.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In January&nbsp;2005, we entered into an exclusive license and
distribution agreement with BioPro. The initial term of the
agreement is for ten years after the date on which the first
regulatory approval allowing sales of
</DIV>

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<DIV align="left" style="font-size: 10pt;">
Vantas to proceed in any country of the designated territory is
issued, unless terminated earlier and automatically renews for
additional periods of one year unless notice of termination is
given.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the agreement, BioPro will be the exclusive distributor of
Vantas in the designated territory consisting of Brunei,
Cambodia, China (including Hong Kong), Laos, India, Indonesia,
Malaysia, the Philippines, Singapore, South Korea, Taiwan,
Thailand and Vietnam. BioPro is required to use commercially
reasonable efforts to apply for and maintain regulatory approval
for Vantas for the treatment of prostate cancer in the
designated territory. In connection with obtaining regulatory
approval for Vantas, we are required to supply BioPro with all
data and information in our possession or control as is
necessary for that purpose. We also granted BioPro an exclusive
license to use the trademarks owned by us, including all
trademarks and trade names approved by us, in connection with
the marketing, distribution and sale of Vantas in the designated
territory. We have given BioPro the non-exclusive right, but not
the obligation, to conduct Phase&nbsp;IV clinical trials
relating to the use of Vantas for the palliative treatment of
prostate cancer in each country of the designated territory.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
BioPro granted us the right to use BioPro&#146;s trademarks on
labeling of Vantas. We have the sole right and responsibility to
manufacture, assemble, package and label Vantas and are required
to supply Vantas in quantities sufficient to meet BioPro&#146;s
demand forecast. We have agreed not to supply Vantas for
distribution or sale in any of the countries in the designated
territory for use in any indication to any other party except
BioPro. BioPro shall pay us a flat transfer fee of $250&nbsp;per
unit and a royalty of 25% of net sales of Vantas, in addition to
various milestone payments. BioPro must pay us a minimum amount
if it fails to achieve certain minimum net sales. In addition,
BioPro is obligated to pay a royalty of 2% of net sales of
Vantas directly to The Population Council or a minimum payment
if certain minimum net sales are not achieved. Twelve months
following the first commercial sales of Vantas in the designated
territory, we will have the right, subject to certain
exceptions, to adjust the price per unit once per year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Manufacturing and Facilities</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We maintain our headquarters and manufacturing facility in
Cranbury, New&nbsp;Jersey in one leased facility consisting of a
total of 51,046&nbsp;square feet. The following table sets forth
more information regarding our facilities.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Address</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Square Feet</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Function</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Lease Expiration</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    7&nbsp;Clarke Drive<BR>
    Cranbury, NJ</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21,274</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    Research and Development;<BR>
    Administration</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2014</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="11">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    8&nbsp;Clarke Drive<BR>
    Cranbury, NJ</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    Manufacturing</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2014</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our manufacturing facility is subject to periodic inspections by
the FDA and other federal and state regulatory agencies and is
subject to cGMP regulations. Our existing manufacturing
facilities are capable of producing commercial quantities of our
implants. In order to achieve cost-effective production, we have
developed proprietary equipment and scalable commercial
manufacturing methods that we use in our production line. We
believe that our current manufacturing facilities, as well as
the space under construction, will provide sufficient capacity
to meet our current needs and support the introduction of new
products over the next several years, and that suitable
additional space will be available in the future on commercially
reasonable terms as needed.
</DIV>

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<B>Competition</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The biotechnology and pharmaceutical industries are very
competitive. In particular, competition for the development and
marketing of urological and endocrine pharmaceutical products is
intense and is expected to increase. Many of our competitors
have substantially greater financial and other resources, larger
research and development staffs and more experience developing
products, obtaining FDA and other regulatory approval of
products and manufacturing and marketing products. We compete
against all pharmaceutical companies that
</DIV>

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manufacture or market LHRH agonist products. In addition, we
compete against biotechnology companies, universities,
government agencies, and other research institutions in the
development of urological and endocrine products, technologies
and processes that are, or in the future may be, the basis for
competitive commercial products.
</DIV>

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In particular, we compete against the following LHRH agonist
products for the palliative treatment of advanced prostate
cancer: TAP Pharmaceutical Products&#146; Lupron and
Sanofi-Aventis&#146; Eligard, both multiple injection
formulations that deliver leuprolide; AstraZeneca&#146;s
Zoladex, a biodegradable rod that delivers goserelin for up to
three months; and Bayer Pharmaceuticals&#146; Viadur, a rigid
metal implant that releases leuprolide over a 12-month period.
With respect to our endocrine pharmaceuticals in late-stage
development for the treatment of CPP and acromegaly, our
competitors currently include TAP Pharmaceutical Products&#146;
Lupron Depot-PED and Novartis&#146; Sandostatin injections and
Sandostatin LAR Depots and Pfizer&#146;s Somavert. We believe
that Vantas represents a more comfortable and convenient
alternative to competing products because it eliminates the
requirement of multiple physician visits and repeated
injections, and is smaller, softer and more flexible than other
implants.
</DIV>

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<B>Regulatory Issues</B>
</DIV>

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    <TD>
    <B><I>General</I></B></TD>
</TR>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The production, distribution and marketing of products employing
our technology, and our research and development activities, are
subject to extensive governmental regulation in the U.S. and in
other countries. In the U.S., our product candidates are
regulated as drugs, and are subject to the Federal Food, Drug
and Cosmetic Act, the Public Health Service Act and the
regulations promulgated under these statutes, as well as to
other federal, state and local statutes and regulations. These
laws govern the clinical and non-clinical testing, manufacture,
safety, effectiveness, approval, labeling, distribution, import,
export, storage, record keeping, reporting, advertising and
promotion of our products. Product development and approval
within this regulatory framework, if successful, will take many
years and involve the expenditure of substantial resources.
Violation of regulatory requirements at any stage may result in
various adverse consequences, including FDA&#146;s delay in
approving or refusal to approve a product. Violations of
regulatory requirements also may result in enforcement actions
including withdrawal of approval, labeling restrictions, seizure
of products, fines, injunctions and civil or criminal penalties.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>Research, Development and Product Approval Process</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The research, development and approval process in the U.S. is
intensive and rigorous, and generally takes many years. The
typical process required by the FDA before a therapeutic drug
may be marketed in the U.S. includes:
</DIV>

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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    pre-clinical laboratory and animal tests and analysis;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    submission to the FDA of an application for an investigational
    new drug application, which must become effective before human
    clinical trials may commence;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    preliminary human clinical studies to evaluate the drug and its
    manner of use;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    adequate and well-controlled human clinical trials to establish
    whether the drug is safe and effective for its intended uses;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    FDA review of whether the facility in which the drug is
    manufactured, processed, packed or held meets standards designed
    to assure the product&#146;s continued quality; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    submission and approval of an appropriate product application to
    the FDA, and approval of the application by the FDA.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During pre-clinical testing, studies are performed with respect
to the chemical and physical properties of candidate
formulations. Biological testing is typically done in animal
models to demonstrate the activity of the compound against the
targeted disease or condition and to assess the apparent effects
of the new product
</DIV>

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candidate on various organ systems, as well as its relative
therapeutic effectiveness and safety. An investigational new
drug application must be submitted to the FDA and become
effective before studies in humans may commence.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the U.S., clinical trial programs in humans generally follow
a three-phase process:
</DIV>

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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Phase&nbsp;I studies are typically conducted in small numbers of
    healthy volunteers or, on occasion, in patients afflicted with
    the target disease, to determine the metabolic and
    pharmacological action of the product candidate in humans, the
    side effects associated with increasing doses, and, if possible,
    to gain early evidence of effectiveness.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Phase&nbsp;II studies are generally conducted in larger groups
    of patients having the target disease or condition in order to
    validate the clinical endpoint and to obtain preliminary data on
    both the effectiveness of the product candidate and optimal
    dosage. This phase also helps determine further the safety
    profile of the product candidate.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Phase&nbsp;III large-scale clinical trials are generally
    conducted in hundreds of patients having the target disease or
    condition to provide sufficient data for the statistical proof
    of effectiveness and safety of the product candidate.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the case of products for cancer and certain other
life-threatening diseases, however, the initial Phase&nbsp;I
testing may be done in patients with the disease rather than in
healthy volunteers. Because these patients are already afflicted
with the target disease or condition, it is possible that such
studies will provide results traditionally obtained in
Phase&nbsp;II studies. These studies are often referred to as
&#147;Phase&nbsp;I/II&#148; studies. Even if patients are used
in initial human testing in a Phase&nbsp;I/II study, the sponsor
is still responsible for obtaining all the data usually obtained
in both Phase&nbsp;I and Phase&nbsp;II studies.
</DIV>

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U.S.&nbsp;law requires that studies conducted to support
approval for product marketing be &#147;adequate and well
controlled.&#148; In general, this means that either a placebo
or a product already approved for the treatment of the disease
or condition under study must be used as a reference control.
Studies must also be conducted in compliance with the FDA&#146;s
good clinical practice regulations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The clinical trial process can take up to ten years or more to
complete, and the data may not be collected in compliance with
good clinical practice regulations, demonstrate that the product
is safe or effective, or be sufficient to support FDA approval
of the product candidate. The FDA may place clinical trials on
hold at any point in this process if, among other reasons, it
concludes that clinical subjects are being exposed to an
unacceptable health risk. Trials may also be terminated by
institutional review boards, which must review and approve all
research involving human subjects. Side effects or adverse
events that are reported during clinical trials can delay,
impede or prevent marketing authorization. Similarly, adverse
events that are reported after marketing authorization can
result in additional limitations being placed on a
product&#146;s use and, potentially, withdrawal of the product
from the market. Any adverse event, either before or after
marketing authorization, can result in liability claims against
us.
</DIV>

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During the course of, and following the completion of clinical
trials, the data are analyzed to determine whether the trials
successfully demonstrated safety and effectiveness and whether a
product approval application may be submitted. In the U.S., if
the product is regulated as a drug, a new drug application must
be submitted and approved before commercial marketing may begin.
The FDA Center for Drug Evaluation and Research, known as CDER,
has responsibility for the review and approval of drugs. The new
drug application must include a substantial amount of data and
other information concerning the safety and effectiveness of the
compound from laboratory, animal and clinical testing, as well
as data and information on manufacturing, product stability and
proposed product labeling.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Each domestic and foreign biopharmaceutical manufacturing
establishment, including any contract manufacturers we may
decide to use must be listed in the new drug application and
must be registered with the FDA. The application will not be
approved until the FDA conducts a manufacturing inspection,
approves the applicable manufacturing process for the drug
product and determines that the facility is in compliance
</DIV>

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with the FDA&#146;s current good manufacturing practice
requirements. If the manufacturing facilities and processes fail
to pass the FDA inspection, we will not receive approval to
market these products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Prescription Drug User Fee Act, the FDA receives fees
for reviewing a new drug application and supplements thereto, as
well as annual fees for both commercial manufacturing
establishments and approved products. These fees can be
significant. The new drug application review fee alone can
exceed $0.5&nbsp;million, although certain deferrals, waivers
and reductions may be available.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under applicable laws and FDA regulations, each new drug
application submitted for FDA approval is usually reviewed for
administrative completeness and reviewability within 45 to
60&nbsp;days following submission of the application. If deemed
complete, the FDA will &#147;file&#148; the new drug
application, thereby triggering substantive review of the
application. The FDA can refuse to file any new drug application
that it deems incomplete or not properly reviewable. If the FDA
refuses to file an application, the FDA will retain 25% percent
of the user fee as a penalty. The FDA has established
performance goals for the review of new drug
applications&nbsp;&#151; six months for priority applications
and ten months for regular applications. However, the FDA is not
legally required to complete its review within these periods and
these performance goals may change over time. Moreover, the
outcome of the review, even if generally favorable, typically is
not an actual approval but an &#147;action letter&#148; that
describes additional work that must be done before the
application can be approved. The FDA&#146;s review of an
application may involve review and recommendations by an
independent FDA advisory committee. Even if the FDA approves a
product, it may limit the approved therapeutic uses for the
product as described in the product labeling, require that
warning statements be included in the product labeling, require
that additional studies be conducted following approval as a
condition of the approval or otherwise limit the scope of any
approval.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Significant legal and regulatory requirements also apply after
FDA approval to market under a new drug application. These
include, among other things, requirements related to adverse
events and other reporting, product advertising and promotion
and ongoing adherence to current good manufacturing practices,
as well as the need to submit appropriate new or supplemental
applications and obtain FDA approval for certain changes to the
approved product, product labeling or manufacturing process. The
FDA also enforces the requirements of the Prescription Drug
Marketing Act, which, among other things, imposes various
requirements in connection with the distribution of product
samples to physicians.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Overall research, development and approval times depend on a
number of factors, including the period of review at the FDA,
the number of questions posed by the FDA during review, how long
it takes to respond to the FDA questions, the severity of
life-threatening nature of the disease in question, the
available of alternative treatments, the availability of
clinical investigators and eligible patients, the rate of
enrollment of patients in clinical trials and the risks and
benefits demonstrated in the clinical trials.
</DIV>

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    <TD>
    <B><I>Drugs for Serious or Life-threatening Illnesses</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Federal Food, Drug and Cosmetic Act and FDA regulations
provide certain mechanisms for the accelerated &#147;Fast
Track&#148; approval of products intended to treat serious or
life-threatening illnesses which have been studied for safety
and effectiveness and which demonstrate the potential to address
unmet medical needs. The procedures permit early consultation
and commitment from the FDA regarding the pre-clinical and
clinical studies necessary to gain marketing approval.
Provisions of this regulatory framework also permit, in certain
cases, new drug applications to be approved on the basis of
valid surrogate markers of product effectiveness, thus
accelerating the normal approval process. Certain product
candidates employing our Hydron Technology might qualify for
this accelerated regulatory procedure. However, the FDA may not
agree, and even if the FDA agrees that these products qualify
for accelerated approval procedures, the FDA may deny approval
of our drugs or may require that additional studies be required
before approval. The FDA may also require us to perform
post-approval, or Phase&nbsp;IV, studies as a condition of such
early approval. In addition, the FDA may impose restrictions on
distribution and promotion in connection with any accelerated
approval and may withdraw approval if post-approval studies do
not confirm the intended clinical benefit or safety of the
product candidates.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>Other U.S.&nbsp;Regulatory Requirements</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the U.S., the research, manufacturing, distribution, sale and
promotion of drugs may also be subject to regulation by various
federal, state and local authorities including the Centers for
Medicare and Medicaid Services (formerly the Health Care
Financing Administration), the U.S.&nbsp;Department of Health
and Human Services and state and local governments. For example,
sales, marketing and scientific and educational grant programs
must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act,
and False Claims Act and similar state laws. Pricing and rebate
programs must comply with the Medicaid rebate requirements of
the Omnibus Budget Reconciliation Act of 1990. If products are
made available to authorized users of the Federal Supply
Schedule of the General Services Administration, additional laws
and requirements apply. All of these activities are also
potentially subject to federal and state consumer protection and
unfair competition laws.
</DIV>

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Moreover, we are now, and may become, subject to additional
federal state and local laws, regulations and policies relating
to safe working conditions, laboratory practices, and
experimental use of animals, and the use, storage, handling,
transportation and disposal of human tissue, waste and hazardous
substances, including radioactive and toxic materials and
infectious disease agents used in conjunction with our research
work.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>European Union Regulatory Requirements</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our ability to market our products outside the U.S. will be
contingent upon receiving marketing authorizations from the
appropriate regulatory authorities and compliance with
applicable post-approval regulatory requirements. Although the
specific requirements and restrictions vary from country to
country, as a general matter, foreign regulatory systems include
risks similar to those associated with FDA regulation, described
above. Under the European Union regulatory systems, marketing
authorizations may be submitted either under a centralized or
decentralized procedure. Under the centralized procedure, a
single application to the European Medicines Agency, known as
the EMEA, leads to an approval granted by the European
Commission which permits the marketing of the product throughout
the European Union. We assume that the centralized procedure
will apply to our products that are developed by means of a
biotechnology process. The decentralized procedure provides for
mutual recognition of nationally approved decisions and is used
for product that do not qualify under the centralized procedure.
Under the decentralized procedure, the holders of a national
marketing authorization may submit further applications to the
competent authorities of the remaining member states, which will
then be requested to recognize the original authorization based
upon an assessment report prepared by the original authorizing
competent authority. The recognition process should take no
longer than 90&nbsp;days, but if one member state made an
objection, which under the legislation can only be based on a
possible risk to human health, we have the option to withdraw
the application from that country or take the application to
arbitration by the Committee for Proprietary Medicinal Products,
known as CPMP, of the EMEA. If a referral for arbitration is
made, the procedure is suspended, and in the intervening time,
the only European Union country in which the product can be
marketed will be the country where the original authorization
has been granted, even if all the other designated countries are
ready to recognize the product. The opinion of the CPMP, which
is binding, could support or reject the objection or
alternatively could reach a compromise position acceptable to
all European Union countries concerned. Arbitration can be
avoided if the application is withdrawn in the objecting
country, but once the application has been referred to
arbitration, it cannot be withdrawn. The arbitration procedure
may take an additional year before a final decision is reached
and may require the delivery of additional data.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As with FDA approval, we may not be able to secure regulatory
approvals in Europe in a timely manner, if at all. Additionally,
as in the U.S., post-approval regulatory requirements, such as
those regarding product manufacturers, marketing or
distribution, would apply to any product that is approved in
Europe, and failure to comply with such obligations could have a
material adverse effect on our ability to successfully
commercialize any product.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
There has recently been introduced in Europe new legislation
designed to harmonize the regulation of clinical trials across
the European Union, and that legislation is currently being
implemented on a country-by-country basis. In addition, new
proposals are under advanced consideration which, if brought
into law, will effect substantial and material changes in the
regulation of medicinal products in Europe. Accordingly, in
</DIV>

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seeking approval for our products in Europe we face a marked
degree of chance and uncertainty both in the regulation of
clinical trials and in respect of marketing authorizations.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>Other Foreign Regulatory Requirements</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We and our collaborative partners are subject to widely varying
foreign regulations, which may be quite different from those of
the FDA, governing clinical trials, product registration and
approval and pharmaceutical sales. Whether or not FDA approval
has been obtained, we must obtain a separate approval for a
product by the comparable regulatory authorities of foreign
countries prior to the commencement of product marketing in
these countries. In certain countries, regulatory authorities
also establish pricing and reimbursement criteria. The approval
process varies from country to country, and the time may be
longer or shorter than that required for FDA approval. In
addition, under current U.S.&nbsp;law, there are significant
restrictions on the export of products not approved by the FDA,
depending on the country involved and the status of the product
in that country.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Employees</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of February&nbsp;28, 2005, we had approximately
79&nbsp;full-time employees, consisting of 21 individuals in
management and administration, 34 individuals in sales and
marketing, 15 individuals in research and development and
manufacturing and 9 individuals in quality assurance and
control. From time to time, we also employ independent
contractors or consultants to support our clinical and
regulatory efforts. None of our employees are represented by a
collective bargaining unit and we have never experienced a work
stoppage. We believe that our relations with our employees are
good.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Litigation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are not subject to any pending or, to our knowledge,
threatened litigation.
</DIV>

<P align="center" style="font-size: 10pt;">54

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<DIV align="left" style="font-size: 10pt;">
 <A name='111'></A>
</DIV>

<!-- link1 "MANAGEMENT" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>MANAGEMENT</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Directors and Executive Officers</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following sets forth information for each of our directors
and executive officers as of February&nbsp;11, 2005.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="43%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Age</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Position</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David S. Tierney,&nbsp;M.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>41</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    President, Chief Executive Officer and Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Matthew L. Rue,&nbsp;III</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>54</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President of Marketing and Commercial Development</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Petr F. Kuzma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>61</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President of Research and Development</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pete J. Perron</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President of Sales</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    James C. Gale</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>55</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Chairman of the Board of Directors</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David R. Dantzker,&nbsp;M.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>61</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jerome Feldman</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>76</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Hubert Huckel,&nbsp;M.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>73</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jeffrey M. Krauss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>48</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Ogden R. Reid</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>79</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Howard Silverman</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>69</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    John T. Spitznagel</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Director</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>David S. Tierney,&nbsp;M.D. </I>is our President and Chief
Executive Officer and a member of our board of directors and has
been with us since August 2000 as an officer and since December
2001 as a director. Prior to joining us, Dr.&nbsp;Tierney was
president of Biovail Technologies, a division of Biovail
Corporation, a Canadian drug delivery company, from January 2000
to August 2000. Prior to Biovail, Dr.&nbsp;Tierney spent three
years at Roberts Pharmaceutical Corporation as senior vice
president of drug development from March 1997 to January 2000.
Prior to joining Roberts, Dr.&nbsp;Tierney spent eight years at
Elan Corporation, plc, a pharmaceutical company, in a variety of
management positions. Dr.&nbsp;Tierney currently serves as a
director on the boards of Able Laboratories, a pharmaceutical
company, and Catalyst Pharmaceutical Partners, a pharmaceutical
company. Dr.&nbsp;Tierney received a medical degree from the
Royal College of Surgeons in Dublin, Ireland and was
subsequently trained in internal medicine.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Matthew L. Rue,&nbsp;III </I>is currently our Vice President
of Marketing and Commercial Development and has been with us
since August 2000. Prior to joining us, Mr.&nbsp;Rue previously
served as director of marketing, product manager, and consultant
at Roberts Pharmaceuticals Corporation from 1996 to 2000.
Mr.&nbsp;Rue&#146;s expertise is in prescription marketing and
product launches and he has launched or re-launched three
prescription brands. Prior to joining Roberts, Mr.&nbsp;Rue
served as an account supervisor at Cline, Davis&nbsp;&#38; Mann,
an advertising company, and was a senior product manager at
Reed&nbsp;&#38; Carnick, a specialty pharmaceutical firm, where
he developed and launched numerous over-the-counter and
prescription pharmaceuticals. Mr.&nbsp;Rue received a B.F.A. in
English from Emerson College.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Petr F. Kuzma </I>is currently our Vice President of Research
and Development and has been with us since 1987. Mr Kuzma has
over thirty years of experience in the polymer, medical device
and pharmaceutical industries. He joined GP Strategies, our
former parent and a global provider of training, e-Learning
solutions, management consulting, engineering and simulation
services in 1975. During his tenure at GP Strategies, he held
numerous research and development positions of increasing scope
and responsibility with various divisions of GP Strategies.
Mr.&nbsp;Kuzma received a M.S. in chemical engineering from
Slovak University in Czechoslovakia, a B.S. in chemistry from
St. Peter&#146;s College, and a B.S. in chemical technology from
the Institute of Industrial Chemistry in Czechoslovakia.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Pete J. Perron </I>is currently our Vice President of Sales
and has been with us since April 2004. Prior to joining us,
Mr.&nbsp;Perron was at Ortho-McNeil Pharmaceutical, Inc., a
Johnson&nbsp;&#38; Johnson company from July 2001 to April 2004,
where he served as product director for several brands,
including two with combined
</DIV>

<P align="center" style="font-size: 10pt;">55

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<DIV align="left" style="font-size: 10pt;">
annual sales in excess of $500&nbsp;million, and as a regional
business director responsible for overseeing several district
managers and more than 75 sales representatives. Prior to
Ortho-McNeil, Mr.&nbsp;Perron was product manager at
G.D.&nbsp;Searle/ Pharmacia from October 1999 to July 2001.
Mr.&nbsp;Perron received a B.A. and an M.S. in business
communications from the University of North Texas.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>James C. Gale </I>is currently the Chairman of our board of
directors and has served as a member of our board of directors
since December 2001. Mr.&nbsp;Gale is the managing director of
Sanders Morris Harris, Inc., a national investment management
and investment banking company and affiliate of several
stockholders of ours, and is the managing partner of LOF
Partners, an affiliate of Sanders Morris Harris that manages
several stockholders of ours and has served in this capacity
since 1998. From 1992 to 1998, Mr.&nbsp;Gale was head of
investment banking at Gruntal&nbsp;&#38; Co., L.L.C., a large
brokerage and investment banking company. Prior to joining
Gruntal, Mr.&nbsp;Gale originated and managed private equity
investments for the Home Insurance Co., Gruntal&#146;s parent,
from 1989 to 1992. Mr.&nbsp;Gale also serves on the board of
directors of Relm Wireless Corporation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>David R. Dantzker,&nbsp;M.D. </I>has served as a member of
our board of directors since June 2003. Dr.&nbsp;Dantzker has
been a general partner at Wheatley Partners, L.P., a New
York-based venture capital firm and one of our stockholders,
since January 2001. He has served on the faculty and in
leadership positions of four major research-oriented medical
schools and has authored or co-authored 130 research papers and
five textbooks. He is an internationally recognized expert in
the area of pulmonary medicine and critical care. Prior to
serving with Wheatley Partners, Dr.&nbsp;Dantzker served as
chief executive officer of Redox Pharmaceuticals Corporation
from November 2000 until October 2001. From January 2000 to May
2000, Dr.&nbsp;Dantzker was president of North Shore-LIJ Health
System, one of the largest academic health systems in the
country. Dr.&nbsp;Dantzker is currently chairman of the board of
directors of Versamed, Inc. and Q-RNA, Inc. and a director of
CNS, Visionsense, Ltd., and Surgical Sealants, Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Jerome I. Feldman </I>has served as a member of our board of
directors since January 2005. Mr.&nbsp;Feldman is the founder of
GP Strategies Corporation, and since 1959, has served as its
chief executive officer. He has also served as chairman of the
board of directors of GP Strategies Corporation since 1999.
Mr.&nbsp;Feldman was president of GP Strategies from 1959 until
2001. He has been chairman of the board of directors of Five
Star Products, Inc., a wholesale distributor of home decorating,
hardware and finishing products, since 1994, a director of GSE
Systems, Inc., a global provider of real-time simulation and
training solutions, since 1994, and chairman of the board of
directors of GSE since 1997. Mr.&nbsp;Feldman is also chairman
of the board of directors and chief executive officer of
National Patent Development Corporation, the parent of one of
our stockholders, MXL&nbsp;Industries, Inc., and a holding
company with interests in optical plastics, paint and hardware
distribution and pharmaceuticals. Mr.&nbsp;Feldman is also
chairman of the New England Colleges Fund and a Trustee of
Northern Westchester Hospital Center.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Hubert Huckel,&nbsp;M.D. </I>has served as a member of our
board of directors since January 2002. From 1964 until his
retirement in December 1992, Dr.&nbsp;Huckel served in various
positions with the Hoechst Group, an agri-chemical company. At
the time of his retirement, he was chairman of the board of
Hoechst-Roussel Pharmaceuticals, Inc., chairman and president of
Hoechst-Roussel Agri-Vet Company and a member of the executive
committee of Hoechst Celanese Corporation. Dr.&nbsp;Huckel
currently serves as a director on the boards of Titan
Pharmaceuticals, Inc., Thermogenesis Corporation, a
biotechnology firm, Concordia Pharmaceuticals, Inc. and Catalyst
Pharmaceutical Partners.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Jeffrey M. Krauss </I>has served as a member of our board of
directors since August 2004. Mr.&nbsp;Krauss has been a managing
member of the Psilos Group, a New York-based venture capital
firm since 2000 and one of our stockholders since August 2004.
Prior to joining Psilos, Mr.&nbsp;Krauss spent ten years at
Nazem&nbsp;&#38; Company as a general partner of three venture
capital funds from 1990 to 2000. Prior to joining Nazem,
Mr.&nbsp;Krauss was an attorney at the law firm of Simpson
Thacher&nbsp;&#38; Bartlett LLP, where he specialized in private
equity transactions. Mr.&nbsp;Krauss is currently a member of
the Healthcare Sector Group of the New York City Investment
Fund. Mr.&nbsp;Krauss is also a certified public accountant.
Mr.&nbsp;Krauss currently serves as a director on the boards of
Quovadx, Inc. and Tegal Corporation.
</DIV>

<P align="center" style="font-size: 10pt;">56

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Ogden R. Reid </I>has served as a member of our board of
directors since December 2001. Mr.&nbsp;Reid was formerly vice
chairman of GTS Duratek, Inc. and is currently director of
General Physics Corporation. From 1953 to 1959, he was president
and executive editor of both the New York Herald Tribune Inc.
and the New York Herald Tribune S.A. As a member of the
U.S.&nbsp;Congress from 1961 to 1974, he served on the Foreign
Affairs, Education and Labor, and Government Operations
Committees. A candidate for Governor of New York in 1974, he
later became Commissioner of the New York State Department of
Environmental Conservation. He was also chairman of the
executive committee for the Board of MGM from 1956 to 1957.
Mr.&nbsp;Reid is currently chairman of the Council of American
Ambassadors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Howard Silverman </I>has served as a member of our board of
directors since December 2001. Mr.&nbsp;Silverman is currently a
director of Getty Petroleum Corporation. From 1974 to 1995,
Mr.&nbsp;Silverman was chairman, president and chief executive
officer of Gruntal and Company, a large brokerage and investment
banking company. While at Gruntal, Mr.&nbsp;Silverman served on
numerous committees for the New York Stock Exchange.
Mr.&nbsp;Silverman formerly served as a director on the boards
of Getty Petroleum, Work Wear Corp., Inc., and Carteret Savings
Bank. He has also served as a trustee of Long Island University
and Chemotherapy Foundation. Mr.&nbsp;Silverman currently serves
as a charter member for the Financial Analysts Federation and
The New York Society of Analysts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>John T. Spitznagel </I>has served as a member of our board of
directors since December 2001. Mr.&nbsp;Spitznagel has been
chairman and chief executive officer of ESP Pharmaceuticals,
Inc. since 2002. Previously, from 1996 to 1999,
Mr.&nbsp;Spitznagel served as president and chief executive
officer of Roberts Pharmaceutical Corporation, a specialty
pharmaceutical firm, which merged with Shire Pharmaceuticals
Group plc in 1999. Prior to joining Roberts, Mr.&nbsp;Spitznagel
was president of Reed and Carnick, a specialty pharmaceutical
firm, from 1990 to 1995. Mr.&nbsp;Spitznagel is the chairman of
the board of directors of ESP Pharmaceuticals, Inc. and a
director of Saturn Pharmaceuticals, Barbeau Pharma, Inc. and IRX
Theapeutics, Inc. and a trustee of Rider College.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Board Composition</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon closing of this offering, our board of directors will
consist of eight directors, each serving a one year term
expiring at the next annual meeting of stockholders. The board
will observe all criteria for independence established by The
Nasdaq National Market, or Nasdaq, and other governing laws and
regulations. No director will be deemed to be independent unless
the board affirmatively determines that the director has no
material relationship with us directly, or as an officer,
stockholder or partner of an organization that has a
relationship with us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Board Committees</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon the completion of this offering, the standing committees of
our board of directors will consist of the Audit Committee,
Compensation Committee and Nominating and Corporate Governance
Committee. These committees are described below. Our board of
directors may also establish various other committees to assist
it in its responsibilities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Audit Committee</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Audit Committee is primarily concerned with the accuracy and
effectiveness of the audits of our financial statements by our
internal audit staff and by our independent auditors. Its duties
include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    selecting independent auditors;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    reviewing the scope of the audit to be conducted by them and the
    results of their audit;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    approving non-audit services provided to us by the independent
    auditor;</TD>
</TR>

</TABLE>

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<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    reviewing the integrity, adequacy and effectiveness of our
    financial reporting process and internal controls; assessing our
    financial reporting practices, including the disclosures in our
    annual and quarterly reports and the accounting standards and
    principles followed;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    conducting other reviews relating to compliance by our employees
    with our policies and applicable laws.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Currently, the Audit Committee is comprised of
Messrs.&nbsp;Krauss and Reid and Dr.&nbsp;Huckel, each of whom
is independent as defined under Nasdaq rules. Mr.&nbsp;Krauss
currently serves as Chairman of the committee. The board of
directors has determined that Mr.&nbsp;Krauss qualifies as
&#147;audit committee financial expert&#148; as that term is
defined under the rules of the Securities and Exchange
Commission, or SEC.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Compensation Committee</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This Compensation Committee&#146;s primary responsibility is to
discharge our board of director&#146;s responsibilities relating
to compensation of our senior executives. Its duties include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    developing guidelines and reviewing the compensation and
    performance of our executive officers;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    setting the compensation of the chief executive officer and
    evaluating his performance based on corporate goals and
    objectives;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    making recommendations to the board of directors with respect to
    incentive compensation plans, equity-based plans and deferred
    compensation plans;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    reviewing director compensation levels and practices, and
    recommending, from time to time, changes in such compensation
    levels and practices to the board of directors.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Currently, the Compensation Committee is comprised of
Messrs.&nbsp;Spitznagel and Silverman and Dr.&nbsp;Dantzker,
each of whom is independent as defined under Nasdaq rules.
Mr.&nbsp;Silverman currently serves as Chairman of the committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Nominating and Corporate Governance Committee</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Nominating and Corporate Governance Committee&#146;s
responsibilities include the selection of potential candidates
for our board of directors and the development and annual review
of our governance principles. This committee also annually
reviews director compensation and benefits, and oversees the
annual self-evaluations of our board of directors and its
committees. It also makes recommendations to our board of
directors concerning the structure and membership of the other
board committees.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Nominating and Corporate Governance Committee is comprised
of Messrs.&nbsp;Gale, Krauss and Feldman, each of whom is
independent as defined under Nasdaq rules. Mr.&nbsp;Gale
currently serves as Chairman of the committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Compensation Committee Interlocks and Insider
Participation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
None of the members of our Compensation Committee were at any
time an officer or employee of ours. In addition, none of our
executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors
or Compensation Committee. Dr.&nbsp;Dantzker has voting control
over 428,571&nbsp;shares of our series&nbsp;C convertible
preferred stock, which was purchased by Wheatley Med Tech
Partners, L.P. in 2004. Mr.&nbsp;Silverman invested $126,846 in
SMH Valera LLC, which purchased shares of our series&nbsp;C
convertible preferred stock in 2004. In addition,
Dr.&nbsp;Dantzker was elected a director as a representative of
Wheatley Med Tech Partners, L.P. under our second amended and
restated investor rights agreement dated August&nbsp;16, 2004.
</DIV>

<P align="center" style="font-size: 10pt;">58

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Compensation of Directors</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our directors currently do not receive, and have not received,
any cash compensation for serving on our board, but are eligible
to receive options and restricted shares of our common stock
under the Valera Pharmaceutical Equity Incentive Plan. In 2004,
Mr.&nbsp;Gale and Mr.&nbsp;Krauss received 5,000 and 90,000
options, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Executive Compensation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes the compensation earned in the
year ended December&nbsp;31, 2004 by our Chief Executive Officer
and the other three most highly paid executive officers whose
total salary and bonus awards exceeded $100,000 for the year
ended December&nbsp;31, 2004. In this prospectus, we refer to
these individuals as our &#147;named executive officers.&#148;
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Summary Compensation Table</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="41%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Long-term</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Compensation</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Annual Compensation</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Awards</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Other</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="center" nowrap><B>Name and Principal Position</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Salary</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Bonus</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Compensation<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Underlying</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options</B></TD><TD></TD>
</TR>

<TR bgcolor="#C4D8E2">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David S. Tierney,&nbsp;M.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>300,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>75,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>475,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR bgcolor="#C4D8E2">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <I>President and Chief Executive Officer</I></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Matthew L. Rue,&nbsp;III</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>168,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>200,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <I>Vice President of Marketing and<BR>
    Commercial Development</I></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR bgcolor="#C4D8E2">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pete J.
    Perron<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>119,109</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>500,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR bgcolor="#C4D8E2">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <I>Vice President of Sales</I></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Petr F. Kuzma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>135,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,801</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>150,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <I>Vice President of Research and Development</I></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>(1)</TD>
    <TD align="left">
    Such amounts represent matching contributions under our 401(k)
    plan.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)</TD>
    <TD align="left">
    Mr.&nbsp;Perron joined Valera in April 2004 at an annual salary
    of $170,000.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Option Grants</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table contains information concerning the grant of
options to purchase shares of our common stock to each of the
named executive officers during the year ended December&nbsp;31,
2004. The percentage of total options granted to employees set
forth below is based on an aggregate of 2,123,000&nbsp;shares
subject to options granted in 2004, including options granted to
named executive officers.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="22%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>Option Grants in Last Fiscal Year</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Potential Realizable</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Percent of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Value at Assumed</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Annual Rates of Stock</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Securities</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Fair Market</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Price Appreciation for</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Underlying</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Granted to</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise or</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Value on</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Option Term</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Employees</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Base Price</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Date of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Expiration</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Granted</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>in 2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>($/share)<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Grant<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Date</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>5%<SUP style="font-size: 85%; vertical-align: text-top">(3)</SUP></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>10%<SUP style="font-size: 85%; vertical-align: text-top">(3)</SUP></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David S. Tierney,&nbsp;M.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>475,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9/27/2014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Matthew L. Rue, III</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>200,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9/27/2014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pete J. Perron</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9/27/2014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Petr F. Kuzma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>150,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9/27/2014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    These options become exercisable as to 25% of the underlying
    shares upon the yearly anniversary of the date of grant.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">59
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    There was no public trading market for our common stock during
    2004. Accordingly, these prices represent the fair market value,
    as determined by our board of directors, of our common stock on
    the date of grant of the options.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Potential realizable values are computed by multiplying the
    number of shares of common stock subject to a given option by
    the assumed initial public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, which is the midpoint of the range set forth on the cover
    of this prospectus, assuming that the aggregate stock value
    derived from that calculation compounds at an annual 5% or 10%
    rate shown in the table for the entire ten-year term of the
    option and subtracting from that result the aggregate option
    exercise price. The 5% and 10% assumed annual rates of stock
    appreciation are mandated by the rules of the SEC and do not
    reflect our estimate or projection of future stock price growth.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Aggregated Options Values at December&nbsp;31, 2004</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth the number and value of
securities underlying unexercised options held by the named
executive officers at December&nbsp;31, 2004. Because there was
no public market for our common stock as of December&nbsp;31,
2004, amounts described in the following table under the heading
&#147;Value of Unexercised In-the-Money Options at
December&nbsp;31, 2004&#148; are determined by multiplying the
number of shares issued or issuable upon exercise of the option
by the difference between the assumed initial public offering
price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, which is the midpoint of the range set forth on the cover
and the per share option exercise price. In 2004, none of our
named executive officers exercised any options.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="44%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Value of Unexercised</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Number of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>In-the-money Options at</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Unexercised Options at</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31, 2004</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31, 2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>($)<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Unexercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Unexercisable</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David S. Tierney,&nbsp;M.D.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,075,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,700,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Matthew L. Rue, III</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>275,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>425,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pete J. Perron</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Petr F. Kuzma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>137,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>362,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Based upon an assumed initial public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, which is the midpoint of the range set forth on the cover
    of this prospectus.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Employment Agreements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We entered into an employment agreement with David Tierney, our
President and Chief Executive Officer, on September&nbsp;16,
2003. In connection with the employment agreement,
Dr.&nbsp;Tierney also entered into an employee confidentiality
and non-competition agreement with us setting forth his
obligations not to compete with us or disclose confidential
information of ours. Pursuant to his employment agreement,
Dr.&nbsp;Tierney is required to devote his full time, attention,
skill and efforts to our business and affairs.
Dr.&nbsp;Tierney&#146;s current base salary, as adjusted by our
board of directors in accordance with the terms of the
agreement, is $300,000. In addition, Dr.&nbsp;Tierney is
eligible to participate in any annual bonus program or benefit
plans and programs adopted by our board of directors. Following
July&nbsp;1, 2006, unless this employment agreement is renewed,
Dr.&nbsp;Tierney will become an &#147;at-will&#148; employee.
The employment agreement provides that we may terminate
Dr.&nbsp;Tierney&#146;s employment with or without cause and
that Dr.&nbsp;Tierney may terminate his employment with or
without good reason.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the event of Dr.&nbsp;Tierney&#146;s employment is terminated
as a result of his death or permanent disability,
Dr.&nbsp;Tierney and/or his spouse or dependents, as applicable,
will receive 24&nbsp;months in the case of death and
29&nbsp;months in the case of permanent disability, of
healthcare and dental insurance continuation at our expense.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the event Dr.&nbsp;Tierney&#146;s employment is terminated by
us other than for cause or if he resigns with good reason,
Dr.&nbsp;Tierney will receive any earned and accrued but unpaid
annual bonus and the continuation of his
</DIV>

<P align="center" style="font-size: 10pt;">60

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<DIV align="left" style="font-size: 10pt;">
current base salary until the later of July&nbsp;1, 2006 or the
last day of the 12-month period, or 18-month period, if
following a change in control, following such termination or
resignation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For purposes of the employment agreement, &#147;cause&#148;
means (i)&nbsp;the commission by the executive of an act of
fraud, misappropriation or personal dishonesty relating to or
involving us in any way; (ii)&nbsp;the executive&#146;s arrest
for, conviction of, or plea of no contest to a felony, the
willful failure, neglect or refusal to perform, or gross
negligence, in the performance of duties and responsibilities;
(iii)&nbsp;the violation by the executive of our rules,
regulations, policies or plans regarding the conduct of our
employees, where such violation continues for 10&nbsp;days
following the executive&#146;s receipt of notice from our board
of directors; or (iv)&nbsp;the violation of any obligations
under the employee confidentiality and non-competition agreement
or the employment agreement, where such violation continues for
10&nbsp;days following the executive&#146;s receipt of notice
from our board of directors.
</DIV>

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In addition, for purposes of the employment agreement,
&#147;good reason&#148; means (i)&nbsp;a change by us in the
executive&#146;s position that materially reduces his duties or
responsibilities (where such change continues for 10&nbsp;days
following our receipt of notice from the executive); (ii)&nbsp;a
reduction by us in the executive&#146;s base salary (other than
pursuant to a company-wide reduction of base salaries for
executives generally); (iii)&nbsp;an executive&#146;s relocation
by us to a facility or location more than 50&nbsp;miles from the
greater Cranbury, New Jersey area, or (iv)&nbsp;our failure to
perform any obligations under the employment agreement (where
such failure continues for 10&nbsp;days following our receipt of
notice from the executive).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Valera Pharmaceuticals, Inc.
Equity Incentive Plan</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In September 2002, we adopted our Equity Incentive Plan or
Equity Plan, which was approved by our stockholders in May 2003.
Our Equity Plan provides for the award of:
</DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    restricted shares of our common stock;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    incentive stock options;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    non-qualified stock options;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any combination of the foregoing.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Grants of restricted shares and non-qualified stock options can
be made to our employees, directors, consultants, and other
individuals who perform services for us. Grants of incentive
stock options may only be made to our employees. The principal
features of our Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to our Equity
Plan, which is filed as an exhibit to the registration statement
of which this prospectus is a part.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Number of shares of our
common stock available under our Equity Plan</I></B>
</DIV>

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As of March&nbsp;10, 2005, we have reserved a total of
11,000,000&nbsp;shares of our common stock for issuance pursuant
to our Equity Plan. Shares subject to forfeited, cancelled, or
expired awards and shares received in satisfaction of the
exercise price of an option become available for grant again
under our Equity Plan. In addition, shares withheld in payment
of any exercise price or in satisfaction of any withholding
obligation arising in connection with an award granted under our
Equity Plan become available for grant again under our Equity
Plan. In connection with recapitalizations, stock splits,
combinations, stock dividends, and other events affecting our
common stock, the compensation committee may make adjustments or
equitable substitutions it deems appropriate in its sole
discretion to the maximum number, type and issuer of the
securities reserved for issuance under the Equity Plan, to the
maximum number, type and issuer of shares of our common stock
subject to outstanding options, to the exercise price of the
options and to the number, type and issuer of restricted shares.
</DIV>

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<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Administration of our Equity
Plan</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our compensation committee administers our Equity Plan under
authority granted to it by our board of directors in accordance
with the terms of our Equity Plan. To administer our Equity
Plan, our compensation
</DIV>

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<DIV align="left" style="font-size: 10pt;">
committee must consist of at least two members of our board of
directors, each of whom is a &#147;non-employee director&#148;
for purposes of Rule&nbsp;16b-3 under the Securities Exchange
Act of 1934, or the Exchange Act and, with respect to awards
that are intended to constitute performance-based compensation
under Section&nbsp;162(m) of the Internal Revenue Code of 1986,
an &#147;outside director&#148; for the purposes of
Section&nbsp;162(m). Our compensation committee, among other
things, interprets our Equity Plan, selects award recipients,
determines the type of awards to be granted to such recipients
and determines the number of shares subject to each award and
the terms and conditions thereof. Our compensation committee may
also determine if or when the exercise price of an option may be
paid in the form of shares of our common stock and the extent to
which shares or other amounts payable with respect to an award
can be deferred by the participant. Our board of directors may
amend or modify our Equity Plan at any time. In addition, our
board of directors is also authorized to adopt, alter and repeal
any rules relating to the administration of our Equity Plan and
to rescind the authority of the compensation committee and
thereafter directly administer our Equity Plan. However, subject
to certain exceptions, no amendment or modification will impair
the rights and obligations of a participant with respect to an
award unless the participant consents to that amendment or
modification.
</DIV>

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Our Equity Plan will continue in effect until terminated by us
in accordance with its terms, although incentive stock options
may not be granted more than 10&nbsp;years after the adoption of
our Equity Plan.
</DIV>

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<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Restricted shares under our
Equity Plan</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Equity Plan, we may issue restricted shares under a
restricted share agreement, the terms and conditions of which
will be set forth by our compensation committee at the time of
the grant. Restricted shares are shares of our common stock
issued to a participant that may not be sold or otherwise
transferred by the participant until certain vesting conditions
established by our compensation committee, in its discretion, at
the time of grant (such as a specified period of continued
employment or the fulfillment of specified individual or
corporate performance goals) are met or until such time as set
by our compensation committee. Holders of the restricted shares
will not have voting rights with respect to such restricted
shares until the lapse of the transfer restrictions described
above. If a participant&#146;s service with us terminates prior
to the end of the transfer restrictions, all of that
participant&#146;s restricted shares which have not vested will
be forfeited. Restricted shares may be sold under our Equity
Plan (at its full value or at a discount) or may be granted
solely in consideration for services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon or in anticipation of a change in control, our compensation
committee may, in its discretion:
</DIV>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    cause restrictions on all outstanding shares of restricted stock
    to lapse;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    cancel restricted stock in exchange for shares of restricted
    stock of a successor corporation;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    redeem restricted shares for cash or other substitute
    consideration.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Stock options under our
Equity Plan</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our Equity Plan permits the grant of incentive stock options and
non-qualified stock options. The exercise price of any incentive
stock options granted under our Equity Plan may not be less than
100% of the fair market value of our common stock on the date of
grant. In the case of any incentive stock option granted to a
participant who owns at least 10% of the total combined voting
power of all classes of our capital stock, our Equity Plan
provides that the exercise price must be at least 110% of the
fair market value of our common stock on the date of the grant
and the incentive stock option must expire on the fifth
anniversary of the date of the grant. In addition, the aggregate
fair market value of shares of our common stock into which
incentive stock options are exercisable, for the first time by a
participant, in any calendar year may not exceed $100,000.
Options granted under our Equity Plan may be exercised for cash
and/or in exchange for previously acquired shares of our common
stock owned by the option holder having a combined value on the
date of exercise equal to the option exercise price.
</DIV>

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Under our Equity Plan, each option will vest and be exercisable
at such time and to such extent as specified in the pertinent
option agreement between us and the option recipient. However,
no award will be exercisable with respect to any shares of our
common stock more than 10&nbsp;years after the date of such
award.
</DIV>

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Unless otherwise specified by our compensation committee with
respect to a particular option, all options are
non-transferable, except upon death. If a participant&#146;s
service with us terminates due to death or disability, any
options held by the participant may be exercised until
(i)&nbsp;such time specified by the compensation committee,
(ii)&nbsp;if not specified by the compensation committee,
12&nbsp;months from termination of service, or (iii)&nbsp;if
earlier than the foregoing, the expiration for the stated term
of the option. If a participant&#146;s service with us is
terminated for cause, any unexercised options will be
automatically forfeited, and any shares of our common stock into
which options are exercisable but for which certificates have
not been issued, will be automatically forfeited and any
exercise price paid for such shares will be refunded. In
addition, if a participant&#146;s service with us is terminated
for any other reason, any option held by the participant may be
exercised until (i)&nbsp;such time specified by the compensation
committee, (ii)&nbsp;if not specified by the compensation
committee, 90&nbsp;days from termination of service, or
(ii)&nbsp;if earlier than the foregoing, the expiration of the
stated term of the option.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon our change in control, our compensation committee may:
</DIV>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    cause outstanding options to become immediately and fully vested
    and exercisable;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    require that the grantees surrender their outstanding options in
    exchange for a payment by us of an amount equal to the amount by
    which the fair market value of the shares of stock subject to
    the option exceeds the option exercise price;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    cancel any outstanding option in exchange for an option to
    purchase common stock of any successor corporation.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>401(k) plan</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We maintain a retirement plan for all employees who satisfy
certain eligibility requirements, including requirements,
including requirements relating to age and length of service.
The retirement plan is intended to qualify as a tax-qualified
plan under Section&nbsp;401 of the Internal Revenue Code. The
retirement plan provides that each participant may contribute up
to, up to a statutory limit, which for most employees is $14,000
in 2005. Under the plan, each employee is fully vested in his or
her deferred salary contributions. Employee contributions are
held and invested by the plan&#146;s trustee at the direction of
the employee. The retirement plan also permits us to make
discretionary contributions and matching contributions, subject
to established limits and vesting schedule. To date, we have not
made any discretionary contributions to the retirement and
deferred savings plan on behalf of participating employees.
</DIV>

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<DIV align="left" style="font-size: 10pt;">
 <A name='112'></A>
</DIV>

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<B>PRINCIPAL STOCKHOLDERS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth information regarding the
beneficial ownership of our common stock as of December&nbsp;31,
2004, before and after this offering, for the following
individuals, entities or groups:
</DIV>

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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    each person or entity who we know beneficially owns more than 5%
    of our outstanding common stock;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    each of the named executive officers;</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    each of our directors;&nbsp;and</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    all directors and executive officers as a group.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect
to the shares. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by
that person that are currently exercisable or will become
exercisable within 60&nbsp;days of December&nbsp;31, 2004 are
deemed outstanding and are included in the number of shares
beneficially owned and are also are shown separately in the
column below entitled &#147;Options Exercisable within
60&nbsp;Days of December&nbsp;31, 2004&#148;, while the shares
are not deemed outstanding for purposes of computing percentage
ownership of any other person. Except as otherwise indicated,
and subject to applicable community property laws, the persons
named in the table have sole voting and investment power with
respect to all shares of common stock held by them.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Applicable percentage ownership in the following table is based
on 61,515,582&nbsp;shares of common stock outstanding as of
December&nbsp;31, 2004
and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock immediately following the completion of this
offering. Unless otherwise indicated, the address for each
stockholder listed in the table is c/o&nbsp;Valera
Pharmaceuticals, Inc., 8 Clarke Drive, Cranbury, New Jersey
08512.
</DIV>

<CENTER>
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<TR style="font-size: 1pt;">
    <TD width="45%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Percentage of</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Shares</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Outstanding</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options Exercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number of Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>within 60&nbsp;Days of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Before</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>After</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Beneficially Owned</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December&nbsp;31, 2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Offering</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Offering</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <I>Five Percent Stockholders</I><B>:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Sanders Morris Harris,
    Inc.<SUP style="font-size: 85%; vertical-align: text-top">(1)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,090,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,249</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48.91</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR bgcolor="#C4D8E2">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    MXL Industries,
    Inc.<SUP style="font-size: 85%; vertical-align: text-top">(2)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,176,064</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19.79</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Wheatley
    Partners<SUP style="font-size: 85%; vertical-align: text-top">(3)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,101,582</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11.54</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR bgcolor="#C4D8E2">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Psilos
    Group<SUP style="font-size: 85%; vertical-align: text-top">(4)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,091,793</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.65</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    NJTC Venture
    Fund<SUP style="font-size: 85%; vertical-align: text-top">(5)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,323,123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.40</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <I>Directors and Named Executive Officers</I><B>:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David S. Tierney,&nbsp;M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,075,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,075,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.72</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Matthew L. Rue,&nbsp;III</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>275,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>275,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Petr F. Kuzma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>137,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>137,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pete J. Perron</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    James C.
    Gale<SUP style="font-size: 85%; vertical-align: text-top">(6)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,098,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48.91</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David R.
    Dantzker,&nbsp;M.D.<SUP style="font-size: 85%; vertical-align: text-top">(7)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,315,668</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.39</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jerome I.
    Feldman<SUP style="font-size: 85%; vertical-align: text-top">(8)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,187,314</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19.81</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Hubert Huckel, M.D.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jeffrey M.
    Krauss<SUP style="font-size: 85%; vertical-align: text-top">(9)</SUP></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,091,793</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.65</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Ogden R. Reid</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>131,714</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>131,714</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Howard Silverman</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    John T. Spitznagel</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    All Directors and Executive Officers as a group</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>51,502,048</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,850,464</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>81.28</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">64

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 3pt;">
<DIV style="width: 15%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp; *&nbsp;</TD>
    <TD align="left">
    Less than 1%.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Represents shares held by SMH Hydro Med, LLC, SMH Hydro
    Med&nbsp;II, LLC, SMH Valera, LLC, Corporate Opportunities Fund,
    L.P., by Corporate Opportunities Fund (Institutional), L.P.,
    Life Sciences Opportunities Fund, L.P., Life Sciences
    Opportunities Fund (Institutional), L.P., each an affiliate of
    Sanders Morris Harris, Inc. The address for Sanders Morris
    Harris, Inc. is 3100&nbsp;JP&nbsp;Morgan Chase Tower,
    600&nbsp;Travis, Suite&nbsp;3100, Houston, TX 77002.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Mr.&nbsp;Feldman is the chairman of the board of directors and
    chief executive officer of National Patent Development
    Corporation, the parent of MXL Industries, Inc. The address for
    MXL Industries, Inc. is 777&nbsp;Westchester Avenue, Fourth
    Floor, White Plains, NY 10604.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Represents shares held by Wheatley Med Tech Partners, LP,
    Wheatley Partners III, LP, Wheatley Associates&nbsp;III, LP,
    Wheatley Foreign Partners&nbsp;III, LP, each an affiliate of
    Wheatley Partners. The address for Wheatley Partners is
    825&nbsp;Third Avenue, 32nd Floor, New York, NY 10022.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    Represents shares held by Psilos Group Partners&nbsp;II SBIC,
    L.P., an affiliate of Psilos Group. The address for Psilos Group
    is 625&nbsp;Avenue of the Americas, 4th Floor, New York, NY
    10011.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(5)&nbsp;</TD>
    <TD align="left">
    Represents shares held by NJTC Venture Fund&nbsp;SBIC, L.P., an
    affiliate of NJTC Venture Fund. The address for NJTC Venture
    Fund is 4&nbsp;Becker Farm Rd., Roseland, NJ 07068.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(6)&nbsp;</TD>
    <TD align="left">
    Includes 30,090,559&nbsp;shares held by SMH described in
    footnote&nbsp;1 above. Mr.&nbsp;Gale is an affiliate of SMH and
    manages the funds described in footnote&nbsp;1 above.
    Mr.&nbsp;Gale disclaims beneficial ownership of the
    30,090,559&nbsp;shares held by SMH except to the extent of his
    pecuniary interest in the funds described in footnote&nbsp;1
    above.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(7)&nbsp;</TD>
    <TD align="left">
    Includes 3,293,168&nbsp;shares held by Wheatley Medtech
    Partners, L.P. described in footnote&nbsp;3 above.
    Dr.&nbsp;Dantzker is a voting member of Wheatley Medtech
    Partners LLC, the general partner of Wheatley Medtech Partners,
    L.P. Dr.&nbsp;Dantzker disclaims beneficial ownership of the
    3,293,168&nbsp;shares held by Wheatley Medtech Partners, L.P.
    except to the extent of his pecuniary interest in that fund.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(8)&nbsp;</TD>
    <TD align="left">
    Mr.&nbsp;Feldman is the chairman of the board of directors and
    chief executive officer of National Patent Development
    Corporation, the parent of MXL Industries, Inc. Mr.&nbsp;Feldman
    disclaims beneficial ownership of the 12,176,064&nbsp;shares
    held by MXL Industries, Inc.</TD>
</TR>

<TR>
    <TD style="font-size: 3pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(9)&nbsp;</TD>
    <TD align="left">
    Represents 4,091,793&nbsp;shares held by Psilos Group described
    in footnote&nbsp;4 above. Mr.&nbsp;Krauss is a managing director
    of Psilos Group. Mr.&nbsp;Krauss disclaims beneficial ownership
    of the 4,091,793&nbsp;shares held by Psilos Group, except to the
    extent of his pecuniary interest in the fund described in
    footnote&nbsp;4 above.</TD>
</TR>

</TABLE>

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<DIV align="left" style="font-size: 10pt;">
<A name='113'></A>
</DIV>

<!-- link1 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into certain agreements or transactions with
certain officers, directors and 5% stockholders. These
agreements or transactions are each summarized below. The
following description is only a summary of what we believe are
the material provisions of the agreements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Loan from Our President and Chief Executive Officer</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We issued a promissory note to our President and Chief Executive
Officer, David&nbsp;S. Tierney, M.D. for the aggregate principal
amount of $200,000 on June&nbsp;23, 2004. The note bore interest
at the UBS Margin Interest Rate charged to Dr.&nbsp;Tierney plus
1.0% and was due and immediately payable upon our receipt of at
least $1,000,000 in other debt or subscriptions to purchase
shares of our series&nbsp;B or series&nbsp;C convertible
preferred stock. We satisfied our obligations under this note on
November&nbsp;3, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Preferred Stock Issuances</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2004, we sold 11,600,000&nbsp;shares of our series&nbsp;C
convertible preferred stock at a price of $1.00&nbsp;per share
to the following holders of more than 5% of our securities and
their affiliated entities: Sanders Morris Harris,
Inc.&nbsp;&#151; 4,500,000; Wheatley Partners&nbsp;&#151;
1,000,000; Psilos Group&nbsp;&#151; 4,000,000; and NJTC Venture
Fund&nbsp;&#151; 1,000,000. James C. Gale, a director, has
voting control over all of the shares of series&nbsp;C
convertible preferred stock purchased by Sanders Morris Harris,
Inc., David R. Dantzker, a director, has voting control over
428,571&nbsp;shares of series&nbsp;C preferred stock, purchased
by Wheatley Med Tech Partners, L.P., Howard Silverman, a
director, invested $126,846, and David S. Tierney, M.D., our
President and Chief Executive Officer, invested $50,000 in SMH
Valera LLC, an affiliate of Sanders Morris Harris Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Appointment of Directors</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to our second amended and restated investor rights
agreement dated August&nbsp;16, 2004, the following persons were
elected to our board of directors: James&nbsp;C. Gale as
representative of the Corporate Opportunities Fund, L.P., David
R. Dantzker, M.D. as representative of Wheatley MedTech Partners
L.P., Jeffrey&nbsp;M. Krauss as representative of Psilos Group
Managers, LLC, and Jerome Feldman as representative of
MXL&nbsp;Industries, Inc. The rights to appoint directors under
the investor rights agreement will terminate upon the effective
date of the registration statement pertaining to this offering.
However, Messrs.&nbsp;Gale, Feldman and Krauss, and Dr. Dantzker
have each agreed to serve as a director for a term of one year
until the next annual meeting of stockholders and until his
respective successor is duly elected and qualified.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The purchasers of our preferred stock are entitled to certain
registration rights under the investor rights agreement. See
&#147;Description of Capital Stock&nbsp;&#151; Registration
Rights.&#148;
</DIV>

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<DIV align="left" style="font-size: 10pt;">
<A name='114'></A>
</DIV>

<!-- link1 "DESCRIPTION OF CAPITAL STOCK" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>DESCRIPTION OF CAPITAL STOCK</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>The description below of our capital stock and provisions of
our amended and restated certificate of incorporation and
amended and restated bylaws are summaries and are qualified by
reference to the amended and restated certificate of
incorporation and the amended and restated bylaws that will
become effective upon closing of this offering. These documents
will be filed as exhibits to the registration statement of which
this prospectus is a part. The descriptions of the common stock
and preferred stock reflect changes to our capital structure
that will occur upon the closing of this offering.</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon the closing of this offering, our authorized capital stock
will consist
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock, par value $0.001&nbsp;per share,
and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of preferred stock, par value $0.001&nbsp;per share. As of
December&nbsp;31, 2004, there were 61,515,582&nbsp;shares of
common stock outstanding after giving effect to the automatic
conversion of all of our outstanding preferred stock into
51,515,582&nbsp;shares of common stock. As of December&nbsp;31,
2004, we had approximately one&nbsp;record holder of our common
stock and approximately 18&nbsp;record holders of our
convertible preferred stock. All of our outstanding shares of
preferred stock will automatically convert into shares of common
stock immediately prior to the closing of this offering. After
the closing of this offering, we will
have &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock and no shares of preferred stock outstanding. In
addition, as of December&nbsp;31, 2004, 7,850,000&nbsp;shares of
our common stock were reserved for grants under our Equity
Incentive Plan and options to purchase 6,716,550&nbsp;shares of
our common stock were outstanding.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Common Stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Holders of shares of our common stock are entitled to one vote
for each share held of record on all matters to be voted on by
stockholders. There is no cumulative voting with respect to the
election of directors. The holders of our common stock are
entitled to receive dividends when, as and if declared by the
board of directors out of funds legally available therefore
subject to the rights of any class of stock having a preference
as to dividends.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the event of a liquidation, dissolution or winding up of us,
the holders of our common stock are entitled to share ratably in
all assets remaining available for distribution to them after
payment of liabilities and after provision has been made for
each class of stock, if any, having preference over the common
stock. Holders of common stock have no conversion, preemptive or
other subscription rights, and there are no redemption
provisions applicable to the common stock. The rights,
preferences and privileges of holders of common stock are
subject to and may be affected by, the rights of the holders of
any shares of preferred stock that we may designate and issue in
the future.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Preferred Stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our certificate of incorporation also authorizes the issuance
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of preferred stock with such designations, rights and
preferences as may be determined from time to time by our board
of directors. Our board of directors can also increase or
decrease the number of shares of any series of our preferred
stock, but not below the number of shares of that series then
outstanding, without any further vote or action by our
stockholders. Our board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of our common
stockholders. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying or
preventing our change in control and may cause the market price
of our common stock to decline or impair the voting and other
rights of the holders of our common stock. We have no current
plans to issue any shares of preferred stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Registration Rights</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In August 2004, concurrently with the sale of our series&nbsp;C
convertible preferred stock, we entered into a second amended
and restated investor rights agreement with the existing holders
of all of our convertible preferred stock and common stock.
Under the agreement, if, at any time after the earlier of
(a)&nbsp;six months following a qualified offering, and
(b)&nbsp;December&nbsp;31, 2005, the holders of at least 50% of
the outstanding
</DIV>

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<DIV align="left" style="font-size: 10pt;">
common stock issued or issuable upon conversion of the
series&nbsp;A, series&nbsp;B, and series&nbsp;C convertible
preferred stock request that we file a registration statement
relating to the sale of our securities held by such holders, we
will use our commercially reasonable best efforts to cause such
shares to be registered, subject to certain limitations. We
believe this offering will be a &#147;qualified offering.&#148;
We are not obligated to affect more than two registrations under
this demand provision. In the case of an underwritten offering,
these demand registration rights are subject to customary
cutbacks.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, if available for our use, the holders of at least
50% of our common stock, including shares held by MXL Industries
and shares, issued or issuable upon conversion of the
series&nbsp;A, series&nbsp;B, and series&nbsp;C convertible
preferred stock may request that we file a registration
statement on Form&nbsp;S-2 or S-3 or other similar short-form
registration statement, subject to customary cutbacks in the
case of an underwritten offering. S-2 and S-3 registration
rights will not available if, among other things, the covered
securities are proposed to be sold to the public at an aggregate
offering price of less than $3,000,000 or if we have filed a
registration statement pursuant to such rights within the
preceding six months.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to the demand registration rights, if we register
any of our securities under the Securities Act, the holders of
our common stock, including shares held by MXL Industries and
shares issued or issuable upon conversion of our series&nbsp;A,
series&nbsp;B, and series&nbsp;C convertible preferred stock,
may require that we include some or all of such shares in that
registration, subject to customary cutbacks in the case of an
underwritten offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are obligated to pay all of the expenses incurred in
connection with any registration under the agreement (exclusive
of underwriting discounts and commissions with respect to any
selling stockholder&#146;s shares).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Holders of our series&nbsp;A, series&nbsp;B, and
series&nbsp;C convertible preferred stock and common stock have
agreed to not sell or otherwise transfer or dispose of any
shares (excluding shares acquired in or following our initial
public offering) for such period of time as required by the
underwriters, in connection with our initial public offering,
not to exceed 180&nbsp;days following the effective date of the
registration statement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our obligations to register shares of our common stock under the
agreement terminate with respect to any holder when all of the
shares of common stock held by such holder that were entitled to
be registered under the agreement may be sold under
Rule&nbsp;144 of the Securities Act during any 90-day period.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Anti-takeover Effects of Provisions of Our Amended and
Restated Certificate of Incorporation and Bylaws and Certain
Provisions of the Delaware General Corporation Law</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Certain provisions of our certificate of incorporation and
bylaws that will be in effect upon completion of this offering,
as summarized below, and applicable provisions of the Delaware
General Corporation Law (the &#147;DGCL&#148;) may make it more
difficult for or prevent a third party from acquiring control of
us or changing our board of directors and management. These
provisions may have the effect of deterring hostile takeovers or
delaying changes in our control or in our management. These
provisions are intended to enhance the likelihood of continued
stability in the composition of our board of directors and in
the policies furnished by them and to discourage certain types
of transactions that may involve an actual or threatened change
in our control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The
provisions also are intended to discourage certain tactics that
may be used in proxy fights. However, these provisions could
have the effect of discouraging others from making tender offers
for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result
from actual or rumored takeover attempts. Such provisions may
also have the effect of preventing changes in our management.
</DIV>

<DIV style="margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Election and removal of directors</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Directors are elected at the annual meetings of stockholders by
a plurality of the votes entitled to vote in the election of
directors and hold office until the next annual meeting of
stockholders and until their successors are duly elected and
qualified, or until their death, resignation or removal.
Directors may be removed without cause by the vote of shares
representing a &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of the votes
entitled to be cast by the outstanding capital stock in the
election of our board of directors. Directors may be removed for
cause by the vote a majority of the shares represented, in
person or by proxy, at a meeting and entitled to vote.
</DIV>

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<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>No cumulative voting</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. The combination
of ownership by a few stockholders of a significant portion of
our issued and outstanding common stock and lack of cumulative
voting will make it more difficult for our other stockholders to
replace our board of directors or for another party to obtain
control of us by replacing our board of directors.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Size of board and vacancies</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our certificate of incorporation provides that the number of
directors on our board of directors will be fixed exclusively by
our board of directors. Newly created directorships resulting
from any increase in our authorized number of directors will be
filled solely by the vote of our remaining directors in office.
Any vacancies in our board of directors resulting from death,
resignation or removal from office or other cause will be filled
solely by the vote of our remaining directors in office.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Stockholder action by written consent</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our certificate of incorporation provides that our stockholders
may not act by written consent without a meeting.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Stockholder meetings</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our certificate of incorporation and bylaws provide that a
special meeting of our stockholders may be called only by the
chairman of our board of directors, our president, secretary,
any two or more directors, or upon the written request of
stockholders who together own of record a majority of the
outstanding stock of all classes entitled to vote, may call
special meetings of our stockholders.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Requirements for advance notification of stockholder
    nominations and proposals</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our bylaws establish advance notice procedures with respect to
stockholder proposals and nomination of candidates for election
as directors other than nominations made by or at the direction
of our board of directors or a committee of our board of
directors.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Undesignated preferred stock</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The authorization of our undesignated preferred stock makes it
possible for our board of directors to issue our preferred stock
with voting or other rights or preferences that could impede the
success of any attempt to change control of us.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Section&nbsp;203 of the General Corporation Law of the
    State of Delaware</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our certificate of incorporation provides that we are not
governed by Section&nbsp;203 of the DGCL. This provision would
generally prohibit a Delaware corporation from engaging in any
business combination with any interested stockholder for a
period of three years following the date that such stockholder
became an interested stockholder.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Transfer Agent and Registrar</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our transfer agent and Registrar
is &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
Their address
is &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
their telephone number
is &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>The Nasdaq National Market</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have applied to have our common stock approved for quotation
on The Nasdaq National Market under the symbol &#147;VLRX.&#148;
</DIV>

<P align="center" style="font-size: 10pt;">69

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<DIV align="left" style="font-size: 10pt;">
<A name='115'></A>
</DIV>

<!-- link1 "SHARES ELIGIBLE FOR FUTURE SALE" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SHARES ELIGIBLE FOR FUTURE SALE</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>General</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon completion of this offering, there will
be &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock outstanding. Of the shares which will be
outstanding after the offering:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    all &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of common stock sold in the offering will be freely tradeable;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    will be &#147;restricted securities&#148; held by
    non-affiliates;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    will be held
    by &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The restricted securities described above are eligible for sale
in the public market, subject to volume limitations, manner of
sale provisions and other requirements of Rule&nbsp;144, from
time to time.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Rule&nbsp;144</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In general, under Rule&nbsp;144 as currently in effect, a person
who has beneficially owned &#147;restricted securities&#148; for
at least one year, including an affiliate, is entitled to sell,
within any three-month period, a number of shares that does not
exceed the greater of:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
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    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    one percent of the then outstanding shares of our common stock
    (approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    immediately following the offering);&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the average weekly trading volume during the four calendar weeks
    preceding filing of notice of such sale.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of ours at any time during the
90&nbsp;days preceding a sale and who owns shares that were
acquired from us or an affiliate of ours for at least two years
prior to the proposed sale is entitled to sell such shares
pursuant to Rule&nbsp;144(k) without regard to the volume
limitations, manner of sale provisions or other limitations of
Rule&nbsp;144.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Shares held
by &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;may
be sold in the public market, subject to the volume, manner of
sale and other limitations of Rule&nbsp;144, but may not be sold
in reliance upon Rule&nbsp;144(k).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Lock-up Agreements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to the limits placed on the sale of shares of our
common stock by operation of Rule&nbsp;144 and other provisions
of the Securities Act of 1933, as amended, we, our directors and
executive officers and holders
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of our common stock (assuming
conversion of all of our shares of preferred stock immediately
prior to the completion of this offering), have entered into
lock-up agreements with the underwriters. Under these
agreements, subject to exceptions, we may not issue any new
shares of common stock, and those holders of stock may not,
directly or indirectly, offer, sell, contract to sell, pledge or
otherwise dispose of or hedge any common stock or securities
convertible into or exchangeable for shares of common stock, or
publicly announce the intention to do any of the foregoing,
without the prior written consent of UBC Securities LLC and Banc
of America Securities LLC for a period of 180&nbsp;days from the
date of this prospectus. This consent may be given at any time
without public notice. If we issue an earnings release or
material news or a material event relating to us occurs during
the 15&nbsp;calendar days plus 3&nbsp;business days before the
last day of the lock-up period, or if prior to the expiration of
the lock-up period, we announce that we will release earnings
results during the 16&nbsp;days following the last day of the
lock-up period, the restrictions provided in the lock-up
agreements will continue to apply until 18&nbsp;days after the
issuance of the earnings release or the occurrence of material
news or a material event. Also, during this 180-day period, we
have agreed not to file any registration statement for, and each
of our officers and stockholders has agreed not to make any
demand for, or exercise any right of, the registration of, any
shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior
written consent of UBS Securities LLC and Banc of America LLC.
</DIV>

<P align="center" style="font-size: 10pt;">70

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<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Registration Rights</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to a second amended and restated investor rights
agreement with investors of our preferred stock, the holders of
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock to be issued upon conversion of their
preferred stock, will be entitled to customary demand and
piggyback registration rights which will require us to register
these shares under the Securities Act upon the occurrence of
certain events, including the earlier of six months following a
qualified offering and December&nbsp;31, 2005 and the
registration of any shares of our common stock, either for our
own account or the account of another person. These stockholders
have agreed to not sell, transfer, make any short sale of, grant
any option for the purchase of, or enter into any hedging or
similar transaction for a period of 180&nbsp;days following the
effective date of the registration statement covering this
offering. See &#147;Description of Capital Stock&nbsp;&#151;
Registration Rights&#148; for a more complete description of the
agreement.
</DIV>

<P align="center" style="font-size: 10pt;">71

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<DIV align="left" style="font-size: 10pt;">
<A name='116'></A>
</DIV>

<!-- link1 "UNDERWRITING" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>UNDERWRITING</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are offering the shares of our common stock described in this
prospectus through the underwriters named below. UBS Securities
LLC and Banc of America Securities LLC are the representatives
of the underwriters. We have entered into an underwriting
agreement with the representatives. Subject to the terms and
conditions of the underwriting agreement, each of the
underwriters has severally agreed to purchase the number of
shares of common stock listed next to its name in the following
table:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="82%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="center" nowrap><B>Underwriter</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>of Shares</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    UBS Securities LLC</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Banc of America Securities LLC</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    First Albany Capital Inc.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fortis Securities LLC</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters&#146; over-allotment option
described below.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our common stock is offered subject to a number of conditions,
including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    receipt and acceptance of our common stock by the
    underwriters;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the underwriters&#146; right to reject orders in whole or in
    part.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have been advised by the representatives that the
underwriters intend to make a market in our common stock but
that they are not obligated to do so and may discontinue making
a market at any time without notice.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Sales of shares made outside of the U.S.&nbsp;may be made by
affiliates of the underwriters.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Over-allotment Option</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have granted the underwriters an option to buy up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
shares of our common stock. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with this offering. The underwriters
have 30&nbsp;days from the date of this prospectus to exercise
this option. If the underwriters exercise this option, they will
each purchase additional shares approximately in proportion to
the amounts specified in the table above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Commissions and Discounts</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Shares sold by the underwriters to the public will initially be
offered at the initial offering price set forth on the cover of
this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the
underwriters to other brokers or dealers at a discount of up to
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share from the initial public offering price. If all the shares
are not sold at the initial public offering price, the
representatives may change the offering price and the other
selling terms. Upon execution of the underwriting agreement, the
underwriters will be obligated to purchase the shares at the
prices and upon the terms stated therein and, as a result, will
thereafter bear any risk associated with changing the offering
price to the public or other selling terms. The underwriters
have informed us that they do not expect discretionary sales to
exceed &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of the shares of common
stock to be offered.
</DIV>

<P align="center" style="font-size: 10pt;">72

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table shows the per share and total underwriting
discounts and commissions we will pay to the underwriters
assuming both no exercise and full exercise of the
underwriters&#146; option to purchase up to an additional shares.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="68%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Full</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We estimate that the total expenses of the offering payable by
us, excluding underwriting discounts and commissions, will be
approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>No Sales of Similar Securities</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We, our executive officers and directors and our existing
stockholders holding an aggregate of
over &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of our shares outstanding
(including securities convertible into or exchangeable or
exercisable for our common stock) have entered into lock-up
agreements with the underwriters. Under these agreements,
subject to certain exceptions, we and each of these persons may
not, without the prior written approval of UBS Securities LLC
and Banc of America Securities LLC, offer, sell, contract to
sell or otherwise dispose of, directly or indirectly, or hedge
our common stock or securities convertible into or exchangeable
or exercisable for our common stock. These restrictions will be
in effect for a period of 180&nbsp;days after the date of this
prospectus. If we issue an earnings release or material news or
a material event relating to us occurs during the 15 calendar
days plus 3 business days before the last day of the lock-up
period, or if prior to the expiration of the lock-up period, we
announce that we will release earnings results during the
16&nbsp;days following the last day of the lock-up period, the
restrictions provided in the lock-up agreements will continue to
apply until 18&nbsp;days after the issuance of the earnings
release or the occurrence of material news or a material event.
At any time and without public notice, UBS Securities LLC and
Banc of America Securities LLC may in their sole discretion
release all or some of the securities from these lock-up
agreements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Indemnification</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities
Act. If we are unable to provide this indemnification, we have
agreed to contribute to payments the underwriters may be
required to make in respect of those liabilities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Nasdaq National Market Quotation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have applied to have our common stock approved for quotation
on The Nasdaq National Market under the symbol &#147;VLRX.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Price Stabilization, Short Positions</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    stabilizing transactions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    short sales;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    purchases to cover positions created by short sales;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    imposition of penalty bids;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    syndicate covering transactions.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common stock while this offering is in progress.
These transactions may also include making short sales of our
common stock, which involve the sale by the underwriters of a
greater number of shares of common stock than they are required
to purchase in this offering and purchasing shares of
</DIV>

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<DIV align="left" style="font-size: 10pt;">
common stock on the open market to cover positions created by
short sales. Short sales may be &#147;covered short sales,&#148;
which are short positions in an amount not greater than the
underwriters&#146; over-allotment option referred to above, or
may be &#147;naked short sales,&#148; which are short positions
in excess of that amount.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters may close out any covered short position either
by exercising their over-allotment option, in whole or in part,
or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase
shares through the over-allotment option.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Naked short sales are sales in excess of the over-allotment
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
stock in the open market that could adversely affect investors
who purchased in this offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of that underwriter in stabilizing or short covering
transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of these activities, the price of our common stock
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on The Nasdaq National Market,
in the over-the-counter market or otherwise.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Determination of Offering Price</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiation by us and the representatives of the
underwriters. The principal factors to be considered in
determining the initial public offering price include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the information set forth in this prospectus and otherwise
    available to the representatives;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our history and prospects, and the history of and prospects for
    the industry in which we compete;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our past and present financial performance and an assessment of
    our management;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our prospects for future earnings and the present state of our
    development;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the general condition of the securities markets at the time of
    this offering;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the recent market prices of, and the demand for, publicly traded
    common stock of generally comparable companies;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    other factors deemed relevant by the underwriters and us.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Directed Share Program</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
At our request, certain of the underwriters have reserved up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of the common stock being
offered by this prospectus for sale at the initial public
offering price to our directors, officers, employees and other
individuals associated with us and members of their families.
The sales will be made by UBS Financial Services Inc., a
selected dealer affiliated with UBS Securities LLC, through a
directed share program. We do not know if these persons will
choose to purchase all or any portion of these reserved shares,
but any purchases they do make will reduce the number of shares
available to the general public. Certain employees and other
persons purchasing these reserved shares will be prohibited from
disposing of or hedging the shares for a period of at least
180&nbsp;days after the date of this prospectus.
</DIV>

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>AFFILIATIONS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Certain of the underwriters and their affiliates may from time
to time provide certain commercial banking, financial advising,
investment banking and other services for us for which they will
be entitled to receive a separate fee.
</DIV>

<DIV align="left" style="font-size: 10pt;">
<A name='117'></A>
</DIV>

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>LEGAL MATTERS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The validity of the securities being offered will passed upon
for us by Pepper Hamilton LLP. Certain legal matters will be
passed upon for the underwriters by Skadden, Arps, Slate,
Meagher&nbsp;&#38; Flom LLP.
</DIV>

<DIV align="left" style="font-size: 10pt;">
<A name='118'></A>
</DIV>

<!-- link1 "EXPERTS" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>EXPERTS</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our financial statements at December&nbsp;31, 2003 and 2004, and
for each of the three years in the period ended
December&nbsp;31, 2004, appearing in this prospectus and
registration statement have been audited by Ernst&nbsp;&#38;
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
</DIV>

<DIV align="left" style="font-size: 10pt;">
<A name='119'></A>
</DIV>

<!-- link1 "AVAILABLE INFORMATION" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>AVAILABLE INFORMATION</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have filed with the SEC a registration statement on
Form&nbsp;S-1 with respect to the common stock offered hereby.
This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in
the registration statement or the exhibits and schedules which
are part of the registration statement. For further information
with respect to us and our common stock and the attached rights,
reference is made to the registration statement and the exhibits
and schedules thereto. You may read and copy any document we
file, including the registration statement and any periodic
reports, proxy statements and other information, at the
SEC&#146;s public reference room at 450&nbsp;Fifth Street, N.W.,
Washington, DC&nbsp;20549. Please call the SEC at 1-800-SEC-0330
for further information on the public reference room. These SEC
filings are also available to the public from the SEC&#146;s
website at http://www.sec.gov.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon completion of the offering, we will become subject to the
information and periodic reporting requirements of the
Securities Exchange Act of 1934 and, in accordance therewith,
will file periodic reports, proxy statements and other
information with the SEC.
</DIV>

<P align="center" style="font-size: 10pt;">75

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<DIV align="left" style="font-size: 10pt;">
<A name='120'></A>
</DIV>

<!-- link1 "INDEX TO FINANCIAL STATEMENTS" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>INDEX TO FINANCIAL STATEMENTS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="91%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#301'>Report of Independent Registered Public
    Accounting Firm</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#302'>Balance Sheets as of December&nbsp;31, 2003
    and 2004</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-2</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#303'>Statements of Operations for the years
    ended December&nbsp;31, 2002, 2003 and 2004</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#304'>Statements of Shareholders&#146; Deficit
    for the years ended December&nbsp;31, 2002, 2003 and 2004</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#305'>Statements of Cash Flows for the years
    ended December&nbsp;31, 2002, 2003 and 2004</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#306'>Notes to Financial Statements</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-6</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#307'>Financial Statement Schedule</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-20</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<A name='301'></A>
</DIV>

<!-- link1 "REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" -->

<DIV align="center" style="font-size: 10pt;">
<B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
The Board of Directors and Shareholders <BR>
 Valera Pharmaceuticals, Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have audited the accompanying balance sheets of Valera
Pharmaceuticals, Inc. as of December&nbsp;31, 2003 and 2004, and
the related statements of operations, shareholders&#146;
deficit, and cash flows for each of the three years in the
period ended December&nbsp;31, 2004. Our audits also included
the financial statement schedule listed in Item&nbsp;16(b) and
the Index to Financial Statements of Form&nbsp;S-1 of this
Registration Statement. These financial statements and schedule
are the responsibility of the Company&#146;s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company&#146;s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Valera Pharmaceuticals, Inc. at December&nbsp;31, 2003 and
2004 and the results of its operations and its cash flows for
each of the three years in the period ended December&nbsp;31,
2004, in conformity with U.S.&nbsp;generally accepted accounting
principles. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As described in Note&nbsp;2 to the financial statements, the
Company has restated its 2003 financial statements to reflect a
deemed dividend on its Series&nbsp;A preferred stock which was
not previously recorded.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 36pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
/s/ Ernst&nbsp;&#38; Young LLP
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
March&nbsp;10, 2005
</DIV>

<DIV align="left" style="font-size: 10pt;">
MetroPark, New Jersey
</DIV>

<P align="center" style="font-size: 10pt;">F-1

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<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<A name='302'></A>
</DIV>

<!-- link1 "BALANCE SHEETS" -->

<DIV align="center" style="font-size: 10pt;">
<B>BALANCE SHEETS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="54%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Pro Forma at</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Restated)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="14" align="center" valign="top">
    <B>ASSETS</B></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current assets:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,241,246</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,052,643</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,052,643</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts receivable, net of allowance of $435,025 at
    December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,914,576</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,914,576</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other accounts receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>573,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Inventories</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,365,018</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,365,018</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Prepaid and other current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>91,467</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>141,651</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>141,651</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Restricted cash</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,906,213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,573,888</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,573,888</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fixed assets, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>351,422</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,704,305</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,704,305</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Security deposits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>406,915</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,664,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>13,323,193</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>13,323,193</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="14">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="14" align="center" valign="top">
    <B>LIABILITIES AND SHAREHOLDERS&#146; (DEFICIT) EQUITY</B></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current liabilities:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,185,298</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,041,393</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,041,393</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>101,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,208,298</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,208,298</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current portion of capital lease obligations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>34,044</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,873</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,873</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,320,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,267,564</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,267,564</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Capital lease obligations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,193</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,193</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;A 6% Cumulative Convertible Preferred Stock,
    $0.001&nbsp;par value; 7,000,000&nbsp;shares authorized,
    7,000,000&nbsp;shares issued and outstanding at
    December&nbsp;31, 2003 and 2004; liquidation
    preference&nbsp;&#151; $7,160,638 at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,743,391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,603,856</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;B 10% Cumulative Convertible Preferred Stock,
    $0.001&nbsp;par value; 24,500,000&nbsp;shares authorized,
    18,620,690 and 22,068,966&nbsp;shares issued and outstanding at
    December&nbsp;31, 2003 and 2004 respectively; liquidation
    preference&nbsp;&#151; $18,362,875 at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,726,055</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,082,305</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;C 6%&nbsp;Convertible Preferred Stock,
    $0.001&nbsp;par value; 11,600,000&nbsp;shares authorized,
    11,600,000&nbsp;shares issued and outstanding at
    December&nbsp;31, 2004; liquidation preference&nbsp;&#151;
    $11,866,201 at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,238,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Shareholders&#146; (deficit) equity:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock, $.001&nbsp;par value; 75,000,000&nbsp;shares
    authorized, 10,000,000&nbsp;shares issued and outstanding at
    December&nbsp;31, 2003 and 2004, respectively;
    61,515,582&nbsp;shares issued and outstanding pro forma
    (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>61,516</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Additional paid-in capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,265,267</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,953,323</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,826,802</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred stock-based compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,532,766</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,532,766</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accumulated deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(20,433,597</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(38,317,116</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(38,317,116</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total shareholders&#146; (deficit) equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,158,330</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(29,886,559</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,038,436</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total liabilities and shareholders&#146; (deficit) equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,664,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>13,323,193</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>13,323,193</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
See accompanying notes.
</DIV>

<P align="center" style="font-size: 10pt;">F-2

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<A name='303'></A>
</DIV>

<!-- link1 "STATEMENTS OF OPERATIONS" -->

<DIV align="center" style="font-size: 10pt;">
<B>STATEMENTS OF OPERATIONS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="53%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(Restated)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net product sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>15,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>7,353</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,511,286</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Licensing revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>134,636</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total net revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,353</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,645,922</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating costs and expenses:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of product sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>608,150</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,319,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,229,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,375,819</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling and marketing</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>269,633</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>509,514</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,025,038</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    General and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,324,378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,838,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,897,435</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total operating expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,913,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,577,144</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,906,442</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,898,714</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,569,791</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,260,520</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44,358</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26,609</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,719</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(28,439</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(13,475</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(70,871</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss before income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,266,672</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Benefit for income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(243,618</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,023,054</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deemed dividend</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,139,535</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,860,465</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss attributable to common shareholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(8,696,192</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(17,883,519</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss attributable to common shareholders
    per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.59</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.87</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.79</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted average shares outstanding&nbsp;&#151; basic and diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unaudited pro forma basic and diluted net loss attributable to
    common shareholders per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.40</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unaudited pro forma weighted average shares
    outstanding&nbsp;&#151; basic and diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44,206,980</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
See accompanying notes.
</DIV>

<P align="center" style="font-size: 10pt;">F-3

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<A name='304'></A>
</DIV>

<!-- link1 "STATEMENTS OF SHAREHOLDERS&#146; DEFICIT" -->

<DIV align="center" style="font-size: 10pt;">
<B>STATEMENTS OF SHAREHOLDERS&#146; DEFICIT</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>For the Years Ended December&nbsp;31, 2002, 2003 and 2004</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="27%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Common Stock</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Additional</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Par</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Paid-in</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Deferred</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Accumulated</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shareholders&#146;</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Value</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Capital</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Compensation</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Deficit</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Deficit</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at December&nbsp;31, 2001</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,262,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(5,854,610</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(582,051</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at December&nbsp;31, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,262,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(11,737,405</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,464,846</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expense related to options granted to non-employees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,708</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deemed dividend</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,139,535</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,139,535</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at December&nbsp;31, 2003 (Restated)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,265,267</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(20,433,597</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,158,330</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred compensation related to stock options, net of
    cancellations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,636,952</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(4,636,952</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of deferred stock-based compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,104,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,104,186</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expense related to options granted to non-employees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>51,104</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>51,104</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deemed dividend</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,860,465</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,860,465</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,023,054</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,023,054</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,953,323</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,532,766</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(38,317,116</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(29,886,559</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
See accompanying notes.
</DIV>

<P align="center" style="font-size: 10pt;">F-4

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<A name='305'></A>
</DIV>

<!-- link1 "STATEMENTS OF CASH FLOWS" -->

<DIV align="center" style="font-size: 10pt;">
<B>STATEMENTS OF CASH FLOWS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Operating activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(12,023,054</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Adjustments to reconcile net loss to net cash used in operating
    activities:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Depreciation and amortization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>199,522</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>153,254</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>257,495</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expense related to options granted to non-employees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>51,104</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock-based compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,104,186</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Change in assets and liabilities:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,914,576</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other accounts receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(573,500</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>573,500</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Inventories</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,365,018</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Restricted cash</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(100,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Prepaid and other current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,044</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(45,167</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(50,184</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Security deposits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(227,599</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(154,616</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>361,915</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>116,064</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>201,176</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>856,095</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>66,384</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,106,915</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash used in operating activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,777,764</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,906,418</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,141,622</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Investing activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Capital expenditures</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(93,365</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(147,664</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,610,378</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash used in investing activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(93,365</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(147,664</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,610,378</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Financing activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Payment of capital lease obligations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(109,163</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(71,304</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(31,687</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net proceeds from issuance of convertible preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,726,055</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,595,084</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash (used in) provided by financing activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(109,163</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,654,751</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,563,397</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net (decrease) increase in cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,980,292</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,600,669</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(188,603</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents at beginning of period</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,620,869</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>640,577</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,241,246</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents at end of period</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>640,577</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,241,246</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,052,643</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Supplemental Disclosure of Non-Cash Financing Activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deemed dividends on preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,139,535</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,860,856</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
See accompanying notes.
</DIV>

<P align="center" style="font-size: 10pt;">F-5

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<A name='306'></A>
</DIV>

<!-- link1 "NOTES TO FINANCIAL STATEMENTS" -->

<DIV align="center" style="font-size: 10pt;">
<B>NOTES TO FINANCIAL STATEMENTS</B>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>1.</B></TD>
    <TD>
    <B>Organization and Description of Business</B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Nature of Operations and Basis of Presentation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Valera Pharmaceuticals, Inc. (&#147;Valera&#148; or the
&#147;Company&#148;), is a specialty pharmaceutical company
focused on the acquisition, development and commercialization of
novel prescription pharmaceuticals, particularly for the
treatment of urological and endocrine conditions and disorders.
Valera was incorporated in the state of Delaware on May&nbsp;30,
2000. On July&nbsp;1, 2003, Valera changed its name from Hydro
Med Sciences, Inc. Prior to May&nbsp;30, 2000, the Company
operated as a division of GP Strategies, and was included in
their consolidated financial statements and federal tax returns.
The Company is located in Cranbury, New Jersey. The Company
operates in a single business segment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company has incurred operating losses in each period since
inception. The Company has been able to fund its cash needs to
date through initial funding from one of its investors, GP
Strategies Corporation, and also through the sale of its
preferred stock. The ability of the Company to manage its
operating expenses to a level that can be financed by existing
cash flows and its ability to obtain additional funding is
therefore critical. The Company&#146;s management intends to
raise additional equity funds and also enter into collaborative
agreements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to November 2004, the Company operated as a
development-stage company and did not generate any substantial
revenue. In November 2004, the Company exited the development
stage when it began selling its initial product Vantas.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>2.</B></TD>
    <TD>
    <B>Basis of Presentation and Significant Accounting Policies</B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Restatement of 2003 Financial Statements</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company has determined that in connection with the issuance
of its Series&nbsp;B 10% Cumulative Convertible Preferred Stock,
(&#147;Series&nbsp;B Preferred Stock&#148;) certain
anti-dilution provisions in its Series&nbsp;A 6% Cumulative
Convertible Preferred Stock (&#147;Series&nbsp;A Preferred
Stock&#148;) were activated. Because the shares of Series&nbsp;B
Preferred Stock were sold at a price below the price that the
shares of Series&nbsp;A Preferred Stock were sold, the
conversion price and conversion ratio of the Series&nbsp;A
Preferred Stock were adjusted in accordance with the original
terms of that issuance when each tranche of Series&nbsp;B
Preferred Stock was issued. These adjustments to the conversion
price and the resulting conversion ratio resulted in deemed
dividends being afforded to the holders of the Series&nbsp;A
Preferred Stock. The total deemed dividend for the two tranches
of Series&nbsp;B Preferred Stock issued in 2003 of $1,139,535
was not originally recorded in the Company&#146;s 2003 financial
statements but such statements have been restated to reflect
this deemed dividend as an increase of Accumulated Deficit and
an increase in the Series&nbsp;A Preferred Stock.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Use of estimates</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The preparation of financial statements in conformity with
U.S.&nbsp;generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Unaudited pro forma information</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In January, 2005, the board of directors authorized management
of the Company to file a registration statement with the
Securities and Exchange Commission permitting the Company to
sell shares of its common stock to the public. If the initial
public offering is completed under the terms presently
anticipated, all of the convertible preferred stock outstanding
at the time of the offering, including accrued dividends will
automatically convert into 51,515,582&nbsp;shares of common
stock (See Note&nbsp;8). Unaudited pro forma convertible
preferred stock and stockholders&#146; equity, as adjusted for
the assumed conversion of the Convertible
</DIV>

<P align="center" style="font-size: 10pt;">F-6

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
Preferred Stock, is set forth on the accompanying balance sheets
and unaudited pro forma earnings per share information assuming
the conversion of the Convertible Preferred Stock is set forth
on the accompanying statements of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Reclassifications</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Certain reclassifications of prior year amounts have been made
to conform to current year presentation.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Cash and Cash Equivalents</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company considers all highly liquid instruments purchased
with a maturity of three months or less to be cash and cash
equivalents. At December&nbsp;31, 2004, the Company had
substantially all of its cash and cash equivalents deposited
with one financial institution.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Restricted Cash</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Restricted cash collateralizes an outstanding letter of credit
associated with the firm that manages some of the Company&#146;s
credit card processing. This letter of credit is to be released
during 2005, and accordingly is classified as a current asset.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Property and Equipment</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
respective assets, generally three to seven years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Leasehold improvements and capitalized leases are recorded at
the fair market value at the inception of the leases and are
amortized over the shorter period of their estimated useful life
or the lease ranging from five to ten years.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Research and Development</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Costs incurred in connection with research and development
activities are expensed as incurred. These costs consist of
direct and indirect costs associated with specific projects as
well as fees paid to various entities that perform research for
the Company.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Inventory</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon regulatory approval of Vantas, the Company&#146;s initial
product, on October&nbsp;12, 2004 the Company began capitalizing
all costs associated with the manufacturing of Vantas. Inventory
is valued at the lower of cost or market, on a first in first
out (&#147;FIFO&#148;)&nbsp;basis. For all periods presented
prior to October&nbsp;12, 2004, the Company expensed all of its
manufacturing costs as research and development.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Shipping and Handling Costs</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Shipping and handling costs incurred for inventory purchases and
product shipments are included within cost of product sales in
the statements of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Stock-based Compensation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As allowed by Statement of Financial Accounting Standards
(&#147;SFAS&#148;) No.&nbsp;123, &#147;Accounting for
Stock-Based Compensation&#148; (SFAS&nbsp;123), the Company has
elected to continue to apply the intrinsic value-based method of
accounting prescribed in Accounting Principles Board
(&#147;APB&#148;) Opinion No.&nbsp;25 &#147;Accounting for Stock
Issued to Employees&#148; (&#147;APB&nbsp;25&#148;) and,
accordingly, does not recognize compensation expense
</DIV>

<P align="center" style="font-size: 10pt;">F-7

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
for stock option grants made at an exercise price equal to or in
excess of the estimated fair value of the stock at the date of
grant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Had compensation cost for the Company&#146;s outstanding
employee stock options been determined based on the fair value
at the grant dates for those options consistent with
SFAS&nbsp;123, the Company&#146;s net loss and basic and diluted
net loss per share, would have been changed to the following pro
forma amounts:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="56%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss attributable to common shareholders&nbsp;&#151; as
    reported</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(8,696,192</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(17,883,519</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Add non-cash employee compensation as reported</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,104,186</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deduct total stock-based employee compensation expense
    determined under fair value based method for all awards</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(47,529</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(46,893</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(205,445</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    SFAS&nbsp;123 pro forma net loss attributable to common
    shareholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(5,930,324</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(8,743,085</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(14,984,778</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss attributable to common shareholders
    per share, as reported</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.59</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.87</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.79</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss attributable to common shareholders
    per share, SFAS&nbsp;123 pro forma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.59</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.87</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.50</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unaudited pro forma basic and diluted net loss attributable to
    common shareholders per share, (Note&nbsp;2) SFAS&nbsp;123</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.34</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
SFAS&nbsp;123 pro forma information regarding net loss is
required by SFAS&nbsp;123, and has been determined as if the
Company had accounted for its stock-based employee compensation
under the fair value method prescribed in SFAS&nbsp;123. The
fair value of the options was estimated at the date of grant
using the minimum value pricing model with the following
assumptions:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="73%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Risk-free interest rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.55</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.03</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.50</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Dividend yield</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.00</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.00</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.00</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expected lives (in years)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted-average contractual life</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.8</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The effects of applying SFAS&nbsp;123 in this pro forma
disclosure are not indicative of future amounts. Stock option
grants are expensed over their respective vesting periods.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company accounts for options issued to non-employees under
SFAS&nbsp;No.&nbsp;123 and EITF Issue 96-18, &#147;Accounting
for Equity Investments that are Issued to Other than Employees
for Acquiring or in Conjunction with Selling Goods or
Services&#148; (&#147;EITF 96-18&#148;). As such, the value of
such options is periodically remeasured and income or expense is
recognized during their vesting terms.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Deferred Stock Compensation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During the year ended December&nbsp;31, 2004, in connection with
the grant of stock options to employees and directors, the
Company recorded deferred stock compensation totaling
$4,636,952, representing the difference between the fair value
of common stock on the date such options were granted,
determined in accordance with GAAP, and the exercise price.
Included in this amount is $3,730,512, net of forfeitures,
</DIV>

<P align="center" style="font-size: 10pt;">F-8

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
representing options that were issued in 2002 and were repriced
in 2003, and $906,440, net of forfeitures, of 2004 grants that
were issued below fair value. These amounts are included as a
reduction of stockholders&#146; equity and are being amortized
over the vesting period of the individual options, generally
four years. During the year ended December&nbsp;31, 2004, the
Company recorded amortization of deferred stock compensation of
$3,104,186.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Income Taxes</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company utilizes the asset and liability method of
accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws
that will be in effect when the differences are expected to
reverse. A valuation allowance is provided when it is more
likely than not that some portion or all of a deferred tax asset
will not be realized.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Net Loss Per Share</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company computes basic net loss per share in accordance with
SFAS&nbsp;No.&nbsp;128, &#147;Earnings per Share&#148;
(&#147;SFAS&nbsp;128&#148;). Under the provisions of
SFAS&nbsp;128, basic net loss per common share (&#147;Basic
EPS&#148;) is computed by dividing net loss by the
weighted-average number of shares of common stock outstanding.
Diluted net loss per share of common stock (&#147;Diluted
EPS&#148;) is computed by dividing net loss by the
weighted-average number of shares of common stock and dilutive
common equivalent shares then outstanding. Common stock
equivalent shares consist of the incremental common shares
issuable upon the conversion of preferred stock, and shares of
common stock issuable upon the exercise of stock options.
Diluted EPS is identical to Basic EPS since common equivalent
shares are excluded from the calculation, as their effect is
anti-dilutive for all periods presented.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="56%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Numerator:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(7,556,657</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(12,023,054</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deemed dividend</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,139,535</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,860,465</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Numerator for basic and diluted net loss attributable to common
    shareholders per share&nbsp;&#151; net loss attributable for
    common shareholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(5,882,795</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(8,696,192</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(17,883,519</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Denominator:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Denominator for basic and dilutive net loss attributable to
    common shareholders per share&nbsp;&#151; weighted-average shares</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,000,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss attributable to common shareholders
    per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.59</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.87</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.79</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Denominator for unaudited pro forma basic and diluted net loss
    attributable to common shareholders per share&nbsp;&#151;
    weighted-average shares (Note&nbsp;2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44,206,980</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unaudited pro forma basic and diluted net loss attributable to
    common shareholders per share (Note&nbsp;2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.40</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Long-lived Assets</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In accordance with SFAS&nbsp;No.&nbsp;144, &#147;Accounting for
the Impairment or Disposal of Long-Lived Assets&#148;
(&#147;SFAS&nbsp;144&#148;), the Company assesses the
recoverability of long-lived assets by determining whether the
</DIV>

<P align="center" style="font-size: 10pt;">F-9

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is
indicated, the Company measures the amount of such impairment by
comparing the fair value to the carrying value. There have been
no indicators of impairment through December&nbsp;31, 2004.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Concentration of Credit Risk</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The financial instrument that potentially subjects the Company
to concentration of credit risk is cash. The Company places its
cash with high-credit quality financial institutions.
Concentrations of credit risk, with respect to this financial
instrument, exist to the extent of amounts presented in the
financial statements. In 2004, one customer accounted for 10.1%
of our net sales and 11.6% of our outstanding receivable at
December&nbsp;31, 2004.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Fair Value of Financial Instruments</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The carrying amounts of the Company&#146;s financial
instruments, which include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate
their fair values.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Revenue Recognition</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company&#146;s revenue recognition policies are in
accordance with Securities and Exchange Commission Staff
Accounting Bulletin (&#147;SAB&#148;) No.&nbsp;104,
&#147;Revenue Recognition in Financial Statements&#148;
(&#147;SAB&nbsp;104&#148;), and SFAS No.&nbsp;48, &#147;Revenue
Recognition When Right of Return Exists&#148;
(&#147;SFAS&nbsp;48&#148;), which provides guidance on revenue
recognition in financial statements, and is based on the
interpretations and practices developed by the Securities and
Exchange Commission. SFAS&nbsp;48 and SAB&nbsp;104 require that
four basic criteria must be met before revenue can be
recognized: (1)&nbsp;persuasive evidence of an arrangement
exists; (2)&nbsp;delivery has occurred or services rendered;
(3)&nbsp;the seller&#146;s price to the buyer is fixed and
determinable; and (4)&nbsp;collectibility is reasonably assured.
Determination of criteria (3)&nbsp;and (4)&nbsp;are based on
management&#146;s judgments regarding the fixed nature of the
fee charged for services rendered and products delivered and the
collectibility of those fees. Should changes in conditions cause
management to determine that these criteria are not met for
certain future transactions, revenue recognition for those
transactions will be delayed and the Company&#146;s revenue
could be adversely affected.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Allowance for Accounts Receivable</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company maintains an allowance for accounts receivable,
which includes an allowance for doubtful accounts related to the
estimated losses that may result from the inability of its
customers to make required payments. This allowance is
determined based upon historical experience and any specific
customer collection issues that have been identified. The
Company began selling its first product on November&nbsp;8, 2004
and has not experienced significant credit losses related to an
individual customer or groups of customers in any particular
industry or geographic area. Also included in the allowance for
accounts receivable is an allowance for sales returns, early
payment discounts, and estimated credit card fees.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Allowance for accounts receivable consists of the following:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="77%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance sales returns</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>270,613</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for doubtful accounts</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,957</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for discounts and credit card fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>80,455</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>435,025</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">F-10

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Preferred Stock
Dividends</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company records deemed dividends when modifications to its
preferred stock are required in accordance with EITF&nbsp;98-5
and EITF&nbsp;00-27. Such modifications occurred in 2003 and
2004 resulting in deemed dividends of $1,139,535 in 2003 and
$5,860,465 in 2004.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Recently Issued Accounting Pronouncements</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On December&nbsp;16, 2004, the Financial Accounting Standards
Board (&#147;FASB&#148;) issued SFAS No.&nbsp;123 (revised
2004), &#147;Share-Based Payment&#148;
(&#147;SFAS&nbsp;123(R)&#148;), which is a revision of SFAS
No.&nbsp;123, &#147;Accounting for Stock-Based
Compensation&#148; (&#147;SFAS&nbsp;123&#148;). SFAS&nbsp;123(R)
supersedes APB&nbsp;25, and amends FASB Statement No.&nbsp;95
&#147;Statement of Cash Flows&#148;. Generally, the approach in
SFAS&nbsp;123(R) is similar to the approach described in
SFAS&nbsp;123. However, SFAS&nbsp;123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
SFAS&nbsp;123(R) must be adopted no later than July&nbsp;1,
2005. Early adoption will be permitted in periods in which
financial statements have not been issued. The Company expects
to adopt SFAS&nbsp;123(R) on July&nbsp;1, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
SFAS&nbsp;123(R) permits public companies to adopt its
requirements using one of two methods:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    1.&nbsp;A &#147;modified prospective&#148; method in which
    compensation cost is recognized beginning with the effective
    date (a)&nbsp;based on the requirements of SFAS&nbsp;123(R) for
    all share-based payments granted after the effective date and
    (b)&nbsp;based on the requirements of SFAS&nbsp;123(R) for all
    awards granted to employees prior to the effective date of
    SFAS&nbsp;123(R) that remain unvested on the effective date.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    2.&nbsp;A &#147;modified retrospective&#148; method which
    includes the requirements of the modified prospective method
    described above, but also permits entities to restate based on
    the amounts previously recognized under SFAS&nbsp;123 for
    purposes of pro forma disclosures either (a)&nbsp;all prior
    periods presented or (b)&nbsp;prior interim periods of the year
    of adoption.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The company is currently evaluating which alternative to adopt.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As permitted by SFAS&nbsp;123, the company currently accounts
for share-based payments to employees using APB&nbsp;25&#146;s
intrinsic value method and as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS&nbsp;123(R)&#146;s fair value method will have
a significant impact on the Company&#146;s results of
operations, although it will have no impact on the
Company&#146;s overall financial position. The impact of
adoption of SFAS&nbsp;123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted SFAS&nbsp;123(R)
in prior periods, the impact of that standard would have
approximated the impact of SFAS&nbsp;123 as described in the
disclosure of pro forma net income and earnings per share in
Note&nbsp;2 to the Company&#146;s financial statements.
SFAS&nbsp;123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as
financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows
in periods after adoption. The Company cannot estimate what
those amounts will be in the future (because they depend on,
among other things, when employees exercise stock options).
</DIV>

<P align="center" style="font-size: 10pt;">F-11

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>3.</B></TD>
    <TD>
    <B>Inventory</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Inventories consist of the following:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="75%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Raw Materials</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>707,893</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Work in process</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>596,866</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Finished goods</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60,259</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,365,018</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>4.</B></TD>
    <TD>
    <B>Property and Equipment</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Property and equipment consists of the following:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="59%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Useful Lives</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Laboratory equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>629,841</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,389,871</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Furniture and fixtures</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>41,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60,286</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Office equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,565</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>41,617</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Computer equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>122,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>326,60</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Computer software</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>51,334</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>159,117</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Leasehold improvements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1-10 years</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>97,124</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>599,584</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>966,357</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,576,735</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less accumulated depreciation and amortization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(614,935</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(872,430</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fixed assets, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>351,422</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,704,305</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Depreciation and amortization expense was $199,522, $153,254 and
$257,495, for the years ended December&nbsp;31, 2002, 2003 and
2004, respectively. Included in fixed assets at
December&nbsp;31, 2003 and 2004 are approximately $385,000 of
assets subject to capital lease obligations with accumulated
amortization of $358,538 and $376,560 as of December&nbsp;31,
2003 and 2004, respectively.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>5.</B></TD>
    <TD>
    <B>Accrued Liabilities</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Accrued liabilities consist of the following:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="72%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued royalties</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>307,258</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued compensation, bonus and benefits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>416,821</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued commissions</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>245,580</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued other</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>101,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>238,639</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>101,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,208,298</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">F-12

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>6.</B></TD>
    <TD>
    <B>Capital Lease Obligations</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The minimum future lease payments related to capital leases as
of December&nbsp;31, 2004 are as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="84%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Year ending December&nbsp;31:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>22,316</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2006</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18,723</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total minimum lease payments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>41,039</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less amount representing interest payments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,973</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Present value of minimum lease payments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35,066</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less current portion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,873</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Long-term portion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>17,193</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>7.</B></TD>
    <TD>
    <B>Commitments</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company leases its facilities and some equipment under
noncancellable operating lease agreements. As of
December&nbsp;31, 2004, the minimum future lease payments under
these leases are as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="81%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Year ending December&nbsp;31:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>826,753</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2006</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>844,877</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2007</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>839,497</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2008</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>839,497</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2009</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>839,497</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Thereafter</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,567,864</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Total rent expense was approximately $405,000, $422,000, and
$663,817 for the years ended December&nbsp;31, 2002, 2003 and
2004, respectively. The Company&#146;s building lease expires
March&nbsp;31, 2014, and the equipment lease expires October
2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>8.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Capitalization</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Common Stock</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company had 10,000,000&nbsp;shares of common stock
outstanding at December&nbsp;31, 2004 and its par value was
$.001. The Company is authorized to issue 75,000,000&nbsp;shares
of common stock with a par value of $.001&nbsp;per share. Each
holder of common stock is entitled to one vote of each share of
common stock held of record on all matters on which stockholders
generally are entitled to vote.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Convertible Preferred Stock</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company is authorized to issue 43,100,000&nbsp;shares of
$.001&nbsp;par value convertible preferred stock of which
7,000,000&nbsp;shares have been designated Series&nbsp;A
Preferred Stock, 24,500,000&nbsp;shares have been designated
Series&nbsp;B Preferred Stock and 11,600,000&nbsp;shares have
been designated Series&nbsp;C 6% Cumulative
</DIV>

<P align="center" style="font-size: 10pt;">F-13

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
Convertible Preferred Stock (&#147;Series&nbsp;C Preferred
Stock&#148;). Such preferred stock is subject to the following
rights and privileges:
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Voting</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Preferred stockholders shall be entitled to cast the number of
votes equal to the number of shares of common stock into which
such shares of Series&nbsp;A Preferred Stock, Series&nbsp;B
Preferred Stock and Series&nbsp;C Preferred Stock (together
referred to as the &#147;Convertible Preferred Stock&#148;)
could then be converted and shall have full voting rights and
powers equal to the voting rights and powers of the common stock
on all matters submitted to the stockholders.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Dividends</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Convertible Preferred Stock shall be entitled to receive
dividends on an as-converted basis with shares of common stock
when, as and if declared by the Board of Directors out of funds
legally available therefore.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to the foregoing provision, each share of
Series&nbsp;A Preferred Stock and Series&nbsp;C Preferred Stock
shall accrue dividends at the rate of 6% of its respective
Preferred Stock Stated Value, and each share of the
Series&nbsp;B Preferred Stock shall accrue dividends at the rate
of 10% of the Series&nbsp;B Stated Value per share (as such
stated value may be adjusted for any stock dividends,
combinations or splits with respect to such shares) per annum,
which shall accrue daily based on a 360-day year, payable when
and as declared by the Board of Directors of the Company out of
funds legally available. The Series&nbsp;A Preferred Stock
dividends shall only accrue from the date of the first issuance
of the shares of Series&nbsp;C Preferred Stock, August&nbsp;16,
2004. No dividends have been declared by the Board of Directors
through December&nbsp;31, 2004.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Liquidation</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the event of any voluntary or involuntary liquidation, sale,
dissolution or winding up of the Company, subject to the rights
of the series of preferred stock that may from time to time come
into existence, the holders of the Convertible Preferred Stock
then outstanding shall be entitled to receive, out of the assets
of the Company available for distribution to its stockholders,
before any payment shall be made in respect of the Common Stock,
an amount per share of Convertible Preferred Stock equal to the
Series&nbsp;A Stated Value, Series&nbsp;B Stated Value or the
Series&nbsp;C Stated Value, as the case may be, plus all accrued
but unpaid dividends thereon to the date fixed for distribution
(the &#147;Convertible Preferred Liquidation Amount&#148;). If
upon the liquidation, dissolution or winding up of the Company,
the assets of the Company available for distribution to its
stockholders shall be insufficient to pay the full Convertible
Preferred Liquidation Amount, then all the assets so available
for distribution to its stockholders shall be distributed
ratably to the holders of the Convertible Preferred Stock in
proportion to the aggregate amounts that would be payable to
such holders if the assets of the Company were sufficient to pay
the full amount to which they were entitled pursuant to this
section and nothing more.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Conversion</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Each share of Convertible Preferred Stock shall be convertible,
at the option of the holder thereof, at any time and from time
to time after the issuance of such share, at the office of the
Company or any transfer agent for such stock, into fully paid
and nonassessable shares of common stock of the Company. The
number of shares of common stock to which a holder of
Convertible Preferred Stock shall be entitled upon conversion
shall be the product obtained by multiplying the Convertible
Preferred Conversion Rate then in effect by the number of shares
of Convertible Preferred Stock, being converted. The Convertible
Preferred Conversion Rate in effect at any time for conversion
of any series of the Convertible Preferred shall be the quotient
obtained by dividing (i)&nbsp;the Convertible Preferred Stated
Value for such series of Convertible Preferred Stock
</DIV>

<P align="center" style="font-size: 10pt;">F-14

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
plus an amount equal to all accrued and unpaid dividends per
share of such Convertible Preferred Stock as of the conversion
date (the &#147;Dividend Amount&#148;) by (ii)&nbsp;the
Conversion Price for such series of Convertible Preferred Stock;
provided, however that a holder of Convertible Preferred Stock
may elect to receive all or a portion of the Dividend Amount in
cash upon conversion of the Convertible Preferred Stock, in
which event the portion of the Dividend Amount paid in cash
shall not be added to the Convertible Preferred Stated Value in
determining the Conversion Rate for such holder of Convertible
Preferred Stock. The initial conversion price for the
Series&nbsp;A Preferred Stock, Series&nbsp;B Preferred Stock and
Series&nbsp;C Preferred Stock shall be $0.50, $0.725 and $1.00
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The initial Conversion Price for each series of Convertible
Preferred Stock shall be adjusted from time to time in
accordance with the agreement. In accordance with the
anti-dilution feature in the Series&nbsp;A Preferred Stock,
there was a deemed dividend for the years ended
December&nbsp;31, 2003 and 2004 of $1,139,535 and $5,860,465,
respectively. Conversion will occur automatically concurrent
with a firm underwritten public offering of not less than
$25,000,000, or on the date specified by vote or written consent
or agreement of holders of at least 80% of the then outstanding
shares of Convertible Preferred Stock voting together as a class
on an as-if-converted basis.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes certain information about the
Convertible Preferred Stock for each series at December&nbsp;31,
2004:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="28%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Undeclared</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Authorized</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Issued and</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Liquidation</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Reserved for</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Accrued</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Outstanding</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Preference</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Conversion</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Dividends</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;A</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>7,160,638</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,321,276</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>160,638</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;B</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24,500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,068,966</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18,362,875</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,328,105</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,362,875</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;C</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,600,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,600,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,866,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,866,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>266,201</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43,100,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40,668,966</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>37,389,714</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>51,515,582</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,789,714</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>9.</B></TD>
    <TD>
    <B>Stock Options</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During 2002, the Company adopted the Valera Pharmaceuticals
Equity Incentive Plan which provides for the granting of
nonqualified and incentive stock options, as defined by the
Internal Revenue Code, to key employees of the Company at prices
not less than the fair market value at the date of grant for
incentive stock options granted. The option price for each share
of common stock for non-qualified options is determined by the
Board of Directors and may be more or less than the fair market
value of a share of common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During 2004, the number of options that could be granted to
employees to purchase under the Company Equity Incentive Plan
was amended to a maximum of 7,850,000&nbsp;shares of common
stock. In addition, the exercise price of all options issued
prior to 2003 was amended in October 2003 to $0.50, the fair
market value at that time. In accordance with FASB
Interpretation (&#147;FIN&#148;) No.&nbsp;44, the repriced
options will be accounted for as variable from the date of the
modification to the date the options are exercised, forfeited,
or expire. In connection with these options, the Company
recorded $3,730,512, net of forfeitures, in deferred stock-based
compensation in 2004. Non-cash compensation expense related to
these repriced options was $3,031,119 in 2004.
</DIV>

<P align="center" style="font-size: 10pt;">F-15

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes option activity for the
Company&#146;s common stock for the years ended
December&nbsp;31, 2002, 2003, and 2004:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="66%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Common</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Weighted-</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Stock</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Average</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise Price</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Plan adopted September&nbsp;23, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,720,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Exercised</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Forfeited</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at December&nbsp;31, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,720,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,935,650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Exercised</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Forfeited</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(23,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at December&nbsp;31, 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,633,150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,123,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Exercised</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Forfeited</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(39,600</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Outstanding at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,716,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes information about vested stock
options outstanding:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="62%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Vested Stock Options</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>430,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>860,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,004,888</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted average exercise price</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes information about stock options
outstanding at December&nbsp;31, 2004:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Weighted-</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Weighted-</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="center" nowrap><B>Range of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Outstanding</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Average</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Average</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="center" nowrap><B>Exercise</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>and</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Remaining</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercise</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="center" nowrap><B>Prices</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Exercisable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Vested</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Contractual Life</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Price</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">$</TD>
    <TD align="right" valign="top" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>6,716,550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>2,004,888</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The weighted average fair value of options granted as of
December&nbsp;31, 2004 was $0.64.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with the granting of employee stock options in
2004, the Company recorded deferred compensation of $906,440,
net of forfeitures. Deferred compensation is being amortized
over the vesting period of the options resulting in non-cash
stock-based compensation expense of $73,067 for the year ended
December&nbsp;31, 2004. There was no deferred compensation
recorded in prior years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For the years ended December&nbsp;31, 2003 and 2004 the Company
granted a total of 65,000 and 30,000, respectively, in stock
options to certain consultants. The Company has accounted for
these options in accordance with EITF&nbsp;96-18 and,
accordingly, recorded non-cash expense of $2,708 and $51,104 for
the years ended December&nbsp;31, 2003 and 2004 respectively. No
options were granted to consultants in 2002. The Company will
continue to remeasure the fair value of unvested stock options
to these consultants.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.</B></TD>
    <TD>
    <B>Income Taxes</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting and the amount used for
income tax purposes. The Company&#146;s
</DIV>

<P align="center" style="font-size: 10pt;">F-16

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
deferred tax assets relate primarily to net operating loss
carryforwards, research and development tax credits, and
non-cash stock-based compensation. At December&nbsp;31, 2003 and
2004, a valuation allowance was recorded to fully offset the net
deferred tax asset. The change in the valuation allowance for
the years ended December&nbsp;31, 2003, 2004 was approximately
$3,213,000 and $4,913,000, respectively. Significant components
of the Company&#146;s deferred tax assets were as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="66%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred tax assets:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net operating loss carryforwards</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>4,990,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>8,050,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development credits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>853,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,131,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock-based compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,085,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of stock-based compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>156,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Non-employee stock compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>353,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total gross deferred tax assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,844,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,797,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred tax liabilities:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Depreciation and amortization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>111,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>151,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total gross deferred tax liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>111,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>151,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Valuation allowance for deferred tax assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,733,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,646,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net deferred tax assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2004, the Company had federal net
operating loss carryforwards of approximately $20,000,000. The
net operating loss carryforwards will expire at various dates
beginning in 2022, if not utilized. The Company has research and
development tax credit carry forwards at December&nbsp;31, 2004
of approximately $1,131,000, which will begin to expire in 2022.
If an ownership change, as defined under Internal Revenue Code
Section&nbsp;382, occurs the use of these carry forwards may be
subject to limitation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Benefit for income tax consists of:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Federal</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    State</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>243,618</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>243,618</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2004, the New Jersey Economic Development Authority approved
the Company&#146;s application to sell New Jersey State income
tax benefits under the New Jersey Technology Tax Transfer
Program (the &#147;Program&#148;). During the fourth quarter of
2004, the Company recognized $243,618 from the sale of State of
New Jersey income tax benefits. The Program requires that the
Company maintain certain employment levels in New Jersey and
that the proceeds from the sale of the tax benefits be spent in
New Jersey.
</DIV>

<P align="center" style="font-size: 10pt;">F-17

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A reconciliation of the statutory tax rates and the effective
tax rates for the periods ended:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="73%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Statutory rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(34</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(34</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(34</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    State and local income taxes (net of federal tax benefit)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development tax credits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Change in valuation allowance</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>11.</B></TD>
    <TD>
    <B>Related Party Transactions</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In June 2004, David S. Tierney, the Company&#146;s President and
CEO, loaned the Company $200,000 at prime plus 1% above the UBS
Margin Interest Rate. The loan was repaid on November&nbsp;3,
2004. Interest in the amount of $1,574 is included in interest
expense for 2004.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>12.</B></TD>
    <TD>
    <B>Pension Plan</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company sponsors a 401(k) plan for eligible employees. The
Company&#146;s contributions to the plan are discretionary and
are 50% of the employee&#146;s contribution, not to exceed 5% of
total compensation. The total Company 401(k) contributions
amounted to approximately $40,000, $49,000 and $55,358 for the
years ended December&nbsp;31, 2002, 2003 and 2004, respectively.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>13.</B></TD>
    <TD>
    <B>Subsequent Events</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On March&nbsp;8, 2005, the Company entered into an additional
building lease of approximately 21,300&nbsp;square feet for its
office and research and development needs. The lease will be
co-terminus with its existing building lease (See Note&nbsp;7).
From inception through June&nbsp;30, 2005, the base rent will be
$43,044&nbsp;per month. From July&nbsp;1, 2005 until
June&nbsp;30, 2010, the annual base rent will be $537,808.
Commencing July&nbsp;1, 2010, the annual base rent will be
$707,999.
</DIV>

<P align="center" style="font-size: 10pt;">F-18

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>NOTES TO FINANCIAL STATEMENTS&nbsp;&#151; (Continued)</B>
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>14.</B></TD>
    <TD>
    <B>Selected Quarterly Financial Data (Unaudited)</B></TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="43%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>Quarter Ended</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>March&nbsp;31</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>June&nbsp;30</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>September&nbsp;30</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December&nbsp;31</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>2003</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,585</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>4,284</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,362,145</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,504,341</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,867,930</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,835,375</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,369,119</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,503,083</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,855,843</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,828,612</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss attributable to common shareholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,369,119</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,549,060</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,855,843</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,922,170</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss attributable to common shareholders
    per common share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.14</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.25</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.19</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.29</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>2004</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>134,636</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,511,286</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of product sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>608,150</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from operations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,017,870</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,539,880</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,569,788</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,132,982</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Benefit for income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(243,618</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,016,161</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,545,041</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,567,872</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,893,980</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss attributable to common shareholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,016,161</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,640,800</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(9,332,578</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,893,980</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted net loss attributable to common shareholders
    per common share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.20</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.36</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.93</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.29</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Diluted EPS is identical to Basic EPS since common stock
equivalent shares are excluded from the calculation, as their
effect is anti-dilutive in all periods presented.
</DIV>

<P align="center" style="font-size: 10pt;">F-19

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>VALERA PHARMACEUTICALS, INC.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<A name='307'></A>
</DIV>

<!-- link1 "Valuation and Qualifying Accounts Schedule" -->

<DIV align="center" style="font-size: 10pt;">
<B>Valuation and Qualifying Accounts Schedule</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Balance at</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Charged to</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Charged</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Beginning of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Cost and</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>to Other</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Balance at</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Period</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Expenses</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Accounts</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Deductions</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>End of Period</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2004:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for Sales Returns</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>270,613</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>270,613</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2003:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for Sales Returns</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2002:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for Sales Returns</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="22">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2004:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for Doubtful Accounts</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,957</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,957</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2003:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for Doubtful Accounts</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2002:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowanced for Doubtful Accounts</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="22">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2004:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for Discounts and Credit Card Fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>91,067</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,612</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>80,455</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2003:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for Discounts and Credit Card Fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2002:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Allowance for Discounts and Credit Card Fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="22">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2004:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax Valuation Allowance</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,733,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,913,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,646,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2003:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax Valuation Allowance</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,521,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,212,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,733,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended December&nbsp;31, 2002:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax Valuation Allowance</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>94,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,427,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,521,000</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">F-20

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt;">
<IMG src="y06541y0654100.gif" alt="(VALERA PHARMACEUTICALS, INC. LOGO)">
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Dealer Prospectus Delivery Obligation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Through and
including &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005 (the 25th day after the date of this prospectus), all
dealers that buy, sell, or trade our common stock, whether or
not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
dealers&#146; obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
</DIV>

<DIV style="margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>PART II</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>INFORMATION NOT REQUIRED IN PROSPECTUS</B>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;13.</B></TD>
    <TD>
    <B><I>Other Expenses of Issuance and Distribution</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth the costs, other than
underwriting discounts and commission, payable by us in
connection with the sale of common stock being registered. All
expenses, except the SEC registration fee and the NASD filing
fee, are estimated.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="81%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Amount</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>to be Paid</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Securities and Exchange Commission registration fee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>8,798.08</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    NASD filing fee Nasdaq National Market listing fee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,975.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Printing and engraving expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Transfer agent and registrar fees and expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Legal fees and expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accountants&#146; fees and expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Blue Sky fees and expenses (including legal fees)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Miscellaneous expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>*</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>*&nbsp;</TD>
    <TD align="left">
    To be filed by amendment.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;14.</B></TD>
    <TD>
    <B><I>Indemnification of Directors and Officers.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our certificate of incorporation provides that we will indemnify
our directors and officers to the fullest extent permitted by
the Delaware General Corporation Law (DGCL). Section&nbsp;145 of
the DGCL provides that a corporation has the power to indemnify
a director, officer, employee, or agent of the corporation and
certain other persons serving at the request of the corporation
in related capacities against expenses (including
attorneys&#146; fees), judgments, fines, and amounts paid in
settlements actually and reasonably incurred by the person in
connection with a threatened, pending, or completed action, suit
or proceeding to which he or she is or is threatened to be made
a party by reason of such position, if such person acted in good
faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation, and, in
any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful, except that, in the
case of actions brought by or in the right of the corporation,
indemnification is limited to expenses (including attorney fees)
actually and reasonably incurred by the person in connection
with defense or settlement of such action or suit and no
indemnification shall be made with respect to any claim, issue,
or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery or other adjudicating court determines that,
despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, to the extent that a present or former director or
officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit, or proceeding
described above (or claim, issue, or matter therein), such
person shall be indemnified against expenses (including
attorneys&#146; fees) actually and reasonably incurred by such
person in connection therewith. Expenses (including
attorneys&#146; fees) incurred by an officer or director in
defending any civil, criminal, administrative, or investigative
action, suit, or proceeding may be advanced by the corporation
upon receipt of an undertaking by such person to repay such
amount if it is ultimately determined that such person is not
entitled to indemnification by the corporation under
Section&nbsp;145 of the DGCL.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our certificate of incorporation provides that we will, to the
fullest extent permitted by law, indemnify, and upon request
shall advance expenses to, any person made or threatened to be
made a party to an action or
</DIV>

<P align="center" style="font-size: 10pt;">II-1

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<DIV align="left" style="font-size: 10pt;">
proceeding by reason of the fact that he or she (or his or her
testators or intestate) is or was our director or officer or
serves or served at any other corporation, partnership, joint
venture, trust or other enterprise in a similar capacity or as
an employee or agent at our request, including service with
respect to employee benefit plans, against expenses (including
attorneys&#146; fees and expenses), judgments, fines, penalties,
and amounts paid in settlement incurred in connection with the
investigation, preparation to defend, or defense of such action,
suit, proceeding, or claim. However, we are not required to
indemnify or advance expenses in connection with any action,
suit, proceeding, claim or counterclaim initiated by or on
behalf of such person.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our certificate of incorporation also provides that, to the
fullest extent permitted by law, a director of the corporation
shall not be personally liable to the corporation or our
stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i)&nbsp;for any breach of
the director&#146;s duty of loyalty to the corporation or its
stockholders, (ii)&nbsp;for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii)&nbsp;for payments of unlawful dividends or
unlawful stock repurchases or redemptions, or (iv)&nbsp;for any
transaction from which the director derived an improper personal
benefit.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any repeal or modification of these provisions of our
certificate of incorporation shall not adversely affect any
right or protection of a director of the corporation for or with
respect to any acts or omissions of that director occurring
prior to the amendment or repeal.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We expect to obtain insurance policies under which our directors
and officers are insured, within the limits and subject to the
limitations of those policies, against certain expenses in
connection with the defense of, and certain liabilities which
might be imposed as a result of, actions, suits or proceedings
to which they are parties by reason of being or having been
directors or officers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Reference is also made to the Underwriting Agreement filed as
Exhibit&nbsp;1.1 to the Registration Statement for information
concerning the underwriters&#146; obligation to indemnify us and
our officers and directors in certain circumstances.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;15.</B></TD>
    <TD>
    <B><I>Recent Sales of Unregistered Securities.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Set forth below is information regarding securities sold by us
since January&nbsp;1, 2002 which were not registered under the
Securities Act.
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (a)&nbsp;Issuances and sales of preferred stock.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (1)&nbsp;In May&nbsp;2003, we issued and sold an aggregate of
    15,172,414&nbsp;shares of our series&nbsp;B preferred stock at a
    price per share of $0.725 to various accredited investors for an
    aggregate offering price of approximately $11,000,000.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (2)&nbsp;In June&nbsp;2003, we issued and sold an aggregate of
    1,379,310&nbsp;shares of our series&nbsp;B preferred stock at a
    price per share of $0.725 to various accredited investors for an
    aggregate offering price of approximately $1,000,000.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (3)&nbsp;In December&nbsp;2003, we issued and sold an aggregate
    of 2,068,966&nbsp;shares of our series&nbsp;B preferred stock at
    a price per share of $0.725 to an accredited investor for an
    aggregate offering price of approximately $1,500,000.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (4)&nbsp;In June&nbsp;2004, we issued and sold an aggregate of
    3,448,276&nbsp;shares of our series&nbsp;B preferred stock at a
    price per share of $0.725 to various accredited investors for an
    aggregate offering price of approximately $2,500,000.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (5)&nbsp;In August&nbsp;2004, we issued and sold an aggregate of
    11,600,000&nbsp;shares of our series&nbsp;C preferred stock at a
    price per share of $1.00 to various accredited investors for an
    aggregate offering price of approximately $11,600,000.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    No underwriters were involved in the foregoing sales of
    securities. The securities described in this paragraph&nbsp;(a)
    of Item&nbsp;15 were issued to a combination of
    U.S.&nbsp;investors and one Canadian investor in reliance upon
    the exemption from the registration requirements of the
    Securities Act, as set forth</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">II-2

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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    in Section&nbsp;4(2) under the Securities Act and Rule&nbsp;506
    of Regulation&nbsp;D promulgated thereunder relating to sales by
    an issuer not involving any public offering, to the extent an
    exemption from such registration was required. The purchasers of
    shares of our stock described above represented to us in
    connection with their purchase that they were accredited
    investors and were acquiring the shares for investment and not
    distribution, that they could bear the risks of the investment
    and could hold the securities for an indefinite period of time.
    The purchasers received written disclosures that the securities
    had not been registered under the Securities Act and that any
    resale must be made pursuant to a registration or an available
    exemption from such registration. The sales of these securities
    were made without general solicitation or advertising.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (b)&nbsp;Stock Option Grants.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (1)&nbsp;In September&nbsp;2002, we issued to certain of our
    employees options to purchase an aggregate of
    1,720,500&nbsp;shares of our common stock at an exercise price
    of $1.00&nbsp;per share. The exercise price was lowered to
    $0.50&nbsp;per share in December 2003.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (2)&nbsp;In December&nbsp;2003, we issued to certain of our
    employees options to purchase an aggregate of
    2,935,650&nbsp;shares of our common stock at an exercise price
    of $0.50&nbsp;per share.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (3)&nbsp;In June&nbsp;2004, we issued to one of our employees
    options to purchase an aggregate of 30,000&nbsp;shares of our
    common stock at an exercise price of $0.50&nbsp;per share.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (4)&nbsp;In July&nbsp;2004, we issued to certain of our
    employees options to purchase an aggregate of
    570,000&nbsp;shares of our common stock at an exercise price of
    $0.50&nbsp;per share.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (5)&nbsp;In August&nbsp;2004, we issued to certain of our
    employees options to purchase an aggregate of
    105,000&nbsp;shares of our common stock at an exercise price of
    $0.50&nbsp;per share.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (6)&nbsp;In September&nbsp;2004, we issued to certain of our
    employees options to purchase an aggregate of
    1,313,000&nbsp;shares of our common stock at an exercise price
    of $0.50&nbsp;per share.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (7)&nbsp;In October&nbsp;2004, we issued to certain of our
    employees options to purchase an aggregate of 105,000 shares of
    our common stock at an exercise price of $0.50 per share.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (8)&nbsp;In January&nbsp;2005, we issued to certain of our
    employees options to purchase an aggregate of 32,000&nbsp;shares
    of our common stock at an exercise price of $1.00&nbsp;per share.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    The stock option grants described in this paragraph&nbsp;(b) of
    Item&nbsp;15 were made pursuant to written compensatory plans or
    agreements in reliance on the exemption provided by
    Rule&nbsp;701 promulgated under the Securities Act.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">II-3

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<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;16.</B></TD>
    <TD>
    <B><I>Exhibits and Financial Statement Schedules.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(a)&nbsp;Exhibits.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 3pt; ">

<TR style="font-size: 1pt;">
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="84%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Exhibit</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Exhibit</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>1.1*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Underwriting Agreement</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amended and Restated Certificate of Incorporation</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3.2*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amended and Restated Certificate of Incorporation (to be
    effective upon completion of the offering)</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Bylaws</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3.4*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amended and Restated Bylaws (to be effective upon completion of
    the offering)</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4.1*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Specimen Common Stock Certificate</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Second Amended and Restated Investor Rights Agreement dated
    August&nbsp;16, 2004</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Incentive Stock Award Agreement</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Non-Qualified Stock Option Agreement</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>5.1*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Opinion of Pepper Hamilton LLP</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Executive Employment Agreement between Valera Pharmaceuticals,
    Inc. and David S. Tierney dated September&nbsp;16, 2003</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.2*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    License and Distribution Agreement between Hydro Med Sciences,
    Inc. and Paladin Labs, Inc. dated October&nbsp;3, 2002</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.3*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Investment Agreement between Hydro Med Sciences, Inc. and
    Paladin Labs, Inc. dated October&nbsp;3, 2002</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.4*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and Key Oncologics dated
    September&nbsp;17, 2003</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Termination Agreement, License Back and Option between Hydro Med
    Sciences, Inc. and Shire US Inc. dated December&nbsp;21, 2001</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Termination of Agreement dated September&nbsp;12, 1990 between
    National Patent Development Corporation and The Population
    Council, Inc. dated October&nbsp;1, 1997</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment to the Termination of the Joint Development Agreement
    between GP Strategies Corporation and The Population Council,
    Inc. dated November&nbsp;29, 2001</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment No.&nbsp;2 to Termination Agreement between Valera
    Pharmaceuticals, Inc. and The Population Council, Inc. dated
    August&nbsp;31, 2004</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement between National Patent Development Corporation
    and Cedar Brook Corporate Center, L.P. dated October&nbsp;6, 1997</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment to Lease between Valera Pharmaceuticals, Inc. and
    Cedar Brook Corporate Center, L.P. dated January&nbsp;7, 2004</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement between Valera Pharmaceuticals, Inc. and Cedar
    Brook 7 Corporate Center, L.P. dated March&nbsp;8, 2005</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Contribution Agreement between Hydro Med Sciences, Inc. and GP
    Strategies Corporation dated June&nbsp;30, 2000</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and BioPro Pharmaceutical, Inc. dated
    January&nbsp;28, 2005</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Valera Pharmaceuticals, Inc. 2002 Equity Incentive Plan</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.15*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Urology Network dated November&nbsp;29, 2004</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.16*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Urology Network (on behalf of U.S. Urology)
    dated December&nbsp;9, 2004</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10.17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Agreement between National Patent Development Corporation and
    Dento-Med Industries, Inc. dated November&nbsp;30, 1989</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consent of Ernst&nbsp;&#38; Young LLP</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23.2*</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consent of Pepper Hamilton LLP (included in Exhibit&nbsp;5.1)</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>24.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Power of Attorney (set forth on the signature page to this
    registration statement)</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt;">
<DIV style="width: 15%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt;">
*&nbsp;To be filed by amendment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(b)&nbsp;Financial Statement Schedules.
</DIV>

<P align="center" style="font-size: 10pt;">II-4

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Financial statements and schedule filed as a part of this
registration statement are listed in the Index to Financial
Statements on page F-1. All other financial statement schedules
are omitted because they are not applicable or not required, or
because the required information is included in the financial
statements or notes thereto.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;17.</B></TD>
    <TD>
    <B><I>Undertakings</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(1)&nbsp;The undersigned registrant hereby undertakes to provide
to the underwriters at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(2)&nbsp;Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(3)&nbsp;The undersigned registrant hereby undertakes that:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (i)&nbsp;For purposes of determining any liability under the
    Securities Act of 1933, the information omitted from the form of
    prospectus filed as part of this registration statement in
    reliance upon Rule&nbsp;430A and contained in a form of
    prospectus filed by the registrant pursuant to
    Rule&nbsp;424(b)(1) or (4)&nbsp;or 497(h) under the Securities
    Act shall be deemed to be part of this registration statement as
    of the time it was declared effective.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (ii)&nbsp;For the purpose of determining any liability under the
    Securities Act of 1933, each post-effective amendment that
    contains a form of prospectus shall be deemed to be a new
    registration statement relating to the securities offered
    therein, and the offering of such securities at that time shall
    be deemed to be the initial <I>bona fide </I>offering thereof.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">II-5

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>SIGNATURES</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in City of Cranbury, State of
New&nbsp;Jersey on March&nbsp;11, 2005.
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    VALERA PHARMACEUTICALS, INC.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 48pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="40%"></TD>
    <TD width="2%"></TD>
    <TD width="58%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>By:&nbsp;</TD>
    <TD align="left">
    /s/ <FONT style="font-variant:SMALL-CAPS">David S. Tierney,
    M.D.</FONT> <BR>

    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt" align="left">&nbsp;</DIV></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    Name:&nbsp;David S. Tierney,&nbsp;M.D.</TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="40%"></TD>
    <TD width="9%"></TD>
    <TD width="51%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>Title:</TD>
    <TD align="left">
    President and Chief Executive Officer</TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>POWER OF ATTORNEY</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Each person whose signature appears below hereby constitutes and
appoints David S. Tierney and Daniel J. Hayes, and each of them,
as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any or
all amendments or supplements to this registration statement,
whether pre-effective or post-effective, including any
subsequent registration statement for the same offering which
may be filed under Rule&nbsp;462(b) under the Securities Act of
1933, as amended, and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing necessary or appropriate to
be done with respect to this registration statement or any
amendments or supplements hereto in the premises, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue
thereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following
persons, in the capacities and on the dates indicated.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
</TR>


<TR>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Title</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Date</B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B>Signature</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">David S.
    Tierney,&nbsp;M.D.<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>David
    S. Tierney,&nbsp;M.D.</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    President, Chief Executive Officer and Director (Principal
    Executive Officer)</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Daniel J. Hayes<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Daniel
    J. Hayes</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director of Finance and Administration (Principal Financial
    Officer and Principal Accounting Officer)</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">James C. Gale<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>James
    C. Gale</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Chairman of the Board of Directors</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">David
    Dantzker,&nbsp;M.D.<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>David
    Dantzker,&nbsp;M.D.</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Jerome Feldman<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Jerome
    Feldman</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Hubert
    Huckel,&nbsp;M.D.<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Hubert
    Huckel,&nbsp;M.D.</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">II-6

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; ">

<TR style="font-size: 1pt;">
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
</TR>


<TR>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Title</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Date</B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B>Signature</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Jeffrey Krauss<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Jeffrey
    Krauss</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Ogden R. Reid<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Ogden
    R. Reid</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">Howard Silverman<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Howard
    Silverman</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    /s/ <FONT style="font-variant:SMALL-CAPS">John T. Spitznagel<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>John
    T. Spitznagel</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March&nbsp;11, 2005</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">II-7

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>INDEX TO EXHIBITS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="85%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Exhibit</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Exhibit</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>1</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Underwriting Agreement</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amended and Restated Certificate of Incorporation</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.2*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amended and Restated Certificate of Incorporation (to be
    effective upon completion of the offering)</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.3</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Bylaws</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>3</TD>
    <TD align="left" valign="top" nowrap>.4*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amended and Restated Bylaws (to be effective upon completion of
    the offering)</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Specimen Common Stock Certificate</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.2</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Second Amended and Restated Investor Rights Agreement dated
    August&nbsp;16, 2004</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.3</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Incentive Stock Award Agreement</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.4</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Non-Qualified Stock Option Agreement</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>5</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Opinion of Pepper Hamilton LLP</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Executive Employment Agreement between Valera Pharmaceuticals,
    Inc. and David S. Tierney dated September&nbsp;16, 2003</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.2*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    License and Distribution Agreement between Hydro Med Sciences,
    Inc. and Paladin Labs, Inc. dated October&nbsp;3, 2002</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.3*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Investment Agreement between Hydro Med Sciences, Inc. and
    Paladin Labs, Inc. dated October&nbsp;3, 2002</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.4*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and Key Oncologics dated
    September&nbsp;17, 2003</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.5</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Termination Agreement, License Back and Option between Hydro Med
    Sciences, Inc. and Shire US Inc. dated December&nbsp;21, 2001</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.6</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Termination of Agreement dated September&nbsp;12, 1990 between
    National Patent Development Corporation and The Population
    Council, Inc. dated October&nbsp;1, 1997</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.7</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment to the Termination of the Joint Development Agreement
    between GP Strategies Corporation and The Population Council,
    Inc. dated November&nbsp;29, 2001</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.8</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment No.&nbsp;2 to Termination Agreement between Valera
    Pharmaceuticals, Inc. and The Population Council, Inc. dated
    August&nbsp;31, 2004</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.9</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement between National Patent Development Corporation
    and Cedar Brook Corporate Center, L.P. dated October&nbsp;6, 1997</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.10</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment to Lease between Valera Pharmaceuticals, Inc. and
    Cedar Brook Corporate Center, L.P. dated January&nbsp;7, 2004</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.11</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement between Valera Pharmaceuticals, Inc. and Cedar
    Brook 7 Corporate Center, L.P. dated March&nbsp;8, 2005</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.12</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Contribution Agreement between Hydro Med Sciences, Inc. and GP
    Strategies Corporation dated June&nbsp;30, 2000</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.13</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and BioPro Pharmaceutical, Inc. dated
    January&nbsp;28, 2005</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.14</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Valera Pharmaceuticals, Inc. 2002 Equity Incentive Plan</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.15*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Urology Network dated November&nbsp;29, 2004.</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.16*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Urology Network (on behalf of
    U.S.&nbsp;Urology) dated December&nbsp;9, 2004</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>10</TD>
    <TD align="left" valign="top" nowrap>.17</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Agreement between National Patent Development Corporation and
    Dento-Med Industries, Inc. dated November&nbsp;30, 1989</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consent of Ernst&nbsp;&#38; Young LLP</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23</TD>
    <TD align="left" valign="top" nowrap>.2*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consent of Pepper Hamilton LLP (included in Exhibit&nbsp;5.1)</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>24</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Power of Attorney (set forth on the signature page to this
    registration statement)</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3pt;">
<DIV style="width: 15%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>*&nbsp;</TD>
    <TD align="left">
    To be filed by amendment.</TD>
</TR>

</TABLE>
</BODY>
</HTML>
[{"type": "S-1", "sequence": "1", "filename": "y06541sv1.htm", "description": "FORM S-1", "secsgml_size_bytes": 1009189}]
{"company-data": {"conformed-name": "Valera Pharmaceuticals Inc", "cik": "0001305409", "irs-number": "000000000"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-123288", "film-number": "05676952"}, "business-address": {"street1": "8 CLARKE DR", "city": "CRANBURY", "state": "NJ", "zip": "08512", "phone": "609-409-9010"}, "mail-address": {"street1": "8 CLARKE DR", "city": "CRANBURY", "state": "NJ", "zip": "08512"}}
FORM S-1
Table of Contents
As filed with the Securities and Exchange Commission on
March 14, 2005.
Registration
No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VALERA PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
2834
13-4119931
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
8 Clarke Drive
Cranbury, New Jersey 08512
(609) 409-9010
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
David S. Tierney, M.D.
President and Chief Executive Officer
Valera Pharmaceuticals, Inc.
8 Clarke Drive
Cranbury, New Jersey 08512
(609) 409-9010
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Robert B. Murphy, Esq.
Raymond A. Miller, Esq.
Pepper Hamilton LLP
600 Fourteenth Street, N.W.
Washington, D.C. 20005-2004
(202) 220-1200
Facsimile: (202) 220-1665
Richard B. Aftanas, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036
(212) 735-3000
Facsimile: (212) 735-2000
Approximate date of commencement of proposed sale to the
public:
As soon as practicable after this Registration
Statement is declared effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box:
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box.
o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Amount of
Title of Each Class of Securities to be Registered
Aggregate Offering Price(1)
Registration Fee
Common Stock, par value $.001
$74,750,000
$8,798.08
(1)
Estimated solely for the purpose of calculating the amount of
    the registration fee pursuant to Rule 457(o) under the
    Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to said Section 8(a), may determine.
Table of Contents
The information
in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and we
are not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not
permitted.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, DATED MARCH 14, 2005
Shares
of Common Stock
This is the initial public offering of our common stock. We are
selling            shares
of common stock. The public offering price of our common stock
is expected to be between
$          and
$          .
Prior to this offering, there has been no public market for our
common stock. We have applied to have our common stock approved
for quotation on The Nasdaq National Market under the symbol,
"VLRX."
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should carefully read the
discussion of material risks of investing in our common stock
under the heading "Risk Factors" beginning on
page 7.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Per Share
Total
Public Offering Price
$
$
Underwriting Discounts and Commissions
$
$
Proceeds, Before Expenses, to Us
$
$
The underwriters may also purchase up to an
additional                      shares
from us at the public offering price, less the underwriting
discounts and commissions, within 30 days from the date of
this prospectus to cover over-allotments.
The underwriters are offering the shares of our common stock as
described in "Underwriting." Delivery of the shares
will be made on or
about                     ,
2005.
UBS Investment Bank
Banc of America Securities LLC
First Albany Capital
Fortis Securities LLC
TABLE OF CONTENTS
Page
Prospectus summary
1
Risk factors
7
Forward-looking statements
20
Use of proceeds
21
Dividend policy
22
Capitalization
23
Dilution
24
Selected historical financial data
26
Management's discussion and analysis
    of financial condition and results of operations
28
Business
40
Management
55
Principal stockholders
64
Certain relationships and related
    transactions
66
Description of our securities
67
Shares eligible for future sale
70
Underwriting
72
Legal matters
75
Experts
75
Available information
75
Index to financial statements
76
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
BYLAWS
SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
FORM OF INCENTIVE STOCK AWARD AGREEMENT
FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT
EXECUTIVE EMPLOYMENT AGREEMENT
TERMINATION AGREEMENT
TERMINATION OF AGREEMENT
AMENDMENT TO THE TERMINATION OF THE JOINT DEVELOPMENT AGREEMENT
AMENDMENT NO. 2 TO TERMINATION AGREEMENT
LEASE AGREEMENT
AMENDMENT TO LEASE
LEASE AGREEMENT
CONTRIBUTION AGREEMENT
LICENSE AND DISTRIBUTION AGREEMENT
2002 EQUITY INCENTIVE PLAN
AGREEMENT
CONSENT OF ERNST & YOUNG LLP
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
different information. The information contained in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any
sale of the shares.
"Vantas" is our registered trademark. Eligard®,
Elmiron®, Lupron®, Lupron Depot-PED®,
Sandostatin®, Sandostatin LAR®, Somavert®,
Viadur® and Zoladex® are the registered trademarks of
others.
i
Table of Contents
PROSPECTUS SUMMARY
This summary highlights selected information contained
elsewhere in this prospectus. You should read the entire
prospectus carefully, including the Risk Factors section
beginning on page 7 and our financial statements and
related notes and schedule beginning on page F-1 before making
an investment decision. References to "we,"
"us," "our" or "Valera" refers to
Valera Pharmaceuticals, Inc.
Our Company
Valera is a fully-integrated specialty pharmaceutical company
concentrating on the development and commercialization of
products for the treatment of urological and endocrine
conditions, diseases and disorders. Our first product, Vantas,
was approved for commercial sale and distribution by the
U.S. Food and Drug Administration, or FDA, in October 2004.
Vantas is a 12-month implant for the palliative treatment of
advanced prostate cancer that delivers histrelin, a luteinizing
hormone-releasing hormone agonist, or LHRH agonist. Vantas is
the only product indicated for the palliative treatment of
prostate cancer that delivers histrelin, the most potent LHRH
agonist available on the market. In November 2004, our sales
force began marketing Vantas to the urologists in the United
States that account for the majority of LHRH agonist product
sales.
In addition to Vantas, we are developing a pipeline of product
candidates that are based on our patented polymer technology, or
Hydron Technology, for indications that include central
precocious puberty, acromegaly, and opioid addiction. Hydron
Technology is our proprietary drug delivery technology that
forms the Vantas implant.
Product Development
The following table summarizes certain information regarding
Vantas and our product candidates.
Therapeutic
Delivery
Next Anticipated
Product
Indication
Area
Method
Status
Milestone
Vantas
Prostate Cancer
Urology
Implant
Commercial Sales
European Regulatory Filing in First Half of 2005
VP002
(Histrelin)
Central Precocious Puberty
Endocrinology
Implant
Phase III
New Drug Application Filing in First Half of 2006
VP003
(Octreotide)
Acromegaly
Endocrinology
Implant
Phase I/II
Phase IIb Clinical Trial in Second Half of 2005
VP004
(Naltrexone)
Addiction Disorders
Central Nervous System
Implant
Pre-clinical
Phase I/II Clinical Trial in First Half of 2006
VP005
(Anti-inflammatory)
Interstitial Cystitis
Urology
Bladder Instillation
Pre-clinical
Phase I/II Clinical Trial in First Half of 2006
Vantas is a soft and flexible implant utilizing our Hydron
Technology to deliver histrelin over a 12-month period for the
palliative treatment of advanced prostate cancer. The total
number of patients with advanced prostate cancer in the
U.S. was approximately 652,000 in 2004, and we estimate the
patient population in Europe to be of similar size. Total
U.S. sales of LHRH agonist products for advanced prostate
cancer were approximately $974 million in 2004 based on IMS
Health market data. We believe that Vantas is a more comfortable
and convenient alternative to competing products because it
eliminates the requirement of multiple physician visits and
repeated injections and is smaller, softer and more flexible
than other implants. We have been marketing Vantas in the
U.S. since November 2004, and we plan to file an
application for regulatory approval in the European Union in the
first half of 2005.
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VP002 is an implant utilizing Hydron Technology to deliver
histrelin over a 12-month period for the treatment of central
precocious puberty, or CPP, which is the early onset of puberty
in young children. The prevalence of this condition is estimated
to be between one in 5,000 to 10,000 children. This yields a
potential population of up to 11,700 children who are 14 or
younger with this condition in the U.S. The only therapy
currently marketed to treat CPP is Lupron Depot-PED, which
consists of monthly intramuscular injections of leuprolide to
hormonally suppress these children. If approved, VP002 would
provide hormonal suppression with histrelin over a 12-month
period. We believe VP002 would have a competitive advantage over
existing products because it eliminates multiple injections in
children and offers increased convenience and reduced costs. We
are currently conducting a single Phase III clinical trial
for VP002 with 36 patients and expect to file a new drug
application with the FDA in the first half of 2006.
VP003 is an implant utilizing Hydron Technology to deliver
octreotide over a six-month period for the treatment of
acromegaly, a chronic hormonal disorder that occurs when a
pituitary tumor produces excess growth hormone, or GH. We
believe that there are approximately 1,000 new acromegalic
patients per year in the U.S. and 16,000 total patients. We
estimate the U.S. acromegalic market to be
$160 million annually, consisting primarily of monthly
injections of octreotide. Octreotide is used to substantially
reduce GH levels and insulin-like growth factor levels in
patients. We believe that there is a market for a longer-acting
octreotide formulation such as VP003 in order to reduce the
number of physician visits for injections. We believe patient
compliance would also be significantly improved by a
longer-acting treatment with VP003. We plan to initiate a
Phase IIb clinical trial in the second half of 2005 to
evaluate the efficacy of VP003 as compared to the monthly
formulation of Sandostatin.
We have several other products in pre-clinical development,
including VP004, an implant using Hydron Technology to deliver
naltrexone for the treatment of addictive disorders, and VP005,
a solution instillation for the treatment of symptoms associated
with interstitial cystitis, a chronic inflammatory condition of
the bladder.
Our Drug Delivery System
We believe that implantable drug delivery systems may provide
safer and more effective administration of therapy by delivering
drugs directly to the bloodstream. Our implant is designed to
allow release of drugs continuously, at even, controlled rates
for up to a 12-month period. We believe that such predictable
release over 12 months has not been achieved by most other
drug delivery systems. In addition, implants utilizing Hydron
Technology eliminate the requirement of multiple physician
visits and repeated injections and are smaller, softer and more
flexible than other implants. We believe that these
characteristics provide Vantas and our product candidates with
the advantages of reduced costs, better patient comfort and
increased patient compliance.
Our Competitive Strengths
We believe that our key competitive strengths that distinguish
us from our competitors include:
•
Technology.
Implants using Hydron Technology can be
    adapted to deliver many different drugs. In addition, these
    implants are soft and flexible, which enhances patient comfort.
    Further, because we own the manufacturing know-how to develop
    products utilizing Hydron Technology, we are able to control and
    maximize its potential commercial uses.
•
Development Capability.
As demonstrated by Vantas, we
    have the internal capability to efficiently develop a product
    and successfully take it through the regulatory process to
    market. We received FDA approval for Vantas within
    10 months of submitting our new drug application. In
    addition, over the past three years, we have advanced two other
    product candidates into late-stage development.
•
Manufacturing Ability.
We manufacture Vantas and our
    product candidates utilizing Hydron Technology in a patented
    process, and because we control the manufacturing process, we
    can ensure high quality and fully realize any manufacturing cost
    efficiencies.
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•
Sales and Marketing.
We have a highly focused sales force
    that call on the urologists that account for the majority of
    LHRH agonist product sales in the U.S. We plan to leverage our
    sales force to market to our current physician base and to
    physicians in additional specialty areas, such as endocrinology.
    We also believe that the direct physician distribution channel
    of Vantas may present a barrier to the future entry of
    competition from generic products as generic drug companies do
    not typically have field sales forces.
Our Business Strategy
In addition to growing sales of our approved product, Vantas,
our goal is to develop and commercialize products for the
treatment of urological and endocrine conditions, diseases and
disorders. To achieve this goal, our strategy includes the
following key elements:
•
Continue to Focus on Urological and Endocrine Conditions,
    Diseases and Disorders;
•
Develop Proprietary Pharmaceutical Portfolio;
•
Develop or Acquire New Drug Delivery Technologies;
•
Leverage Sales and Marketing Expertise; and
•
Partner Outside the U.S. to Reach New Geographic Markets.
Corporate Information
We were incorporated in the State of Delaware in 2000 as Hydro
Med Sciences, Inc. Prior to that time, we operated as a division
of GP Strategies Corporation. We changed our name from Hydro Med
Sciences, Inc. to Valera Pharmaceuticals, Inc. in July 2003. Our
principal executive offices are located at 8 Clarke Drive,
Cranbury, New Jersey 08512, and our telephone number at that
address is (609) 409-9010. Our website address is
http://www.valerapharma.com. Information contained in our
website is not a part of this prospectus.
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Table of Contents
The Offering
Common Stock Offered
shares
Common Stock Outstanding After the Offering
shares
Use of Proceeds
We expect to use the net proceeds from this offering to expand
    our sales and marketing capabilities, fund our research and
    development activities, and expand our manufacturing
    capabilities and for general corporate purposes. In addition, we
    may use a portion of the net proceeds to acquire products or
    technologies that are complementary to our current or future
    business and product lines.
Proposed Nasdaq Symbol
"VLRX"
Risk Factors
You should read the "Risk Factors" section of this
    prospectus for a discussion of factors to consider before
    deciding to invest in our common stock.
The number of shares of our common stock outstanding after this
offering is based on 61,515,582 shares outstanding as of
December 31, 2004. Unless otherwise indicated, all
information in this prospectus assumes the following:
•
a     -for-     reverse
    split of our common stock to be completed before the closing of
    this offering;
•
the conversion of 40,668,966 outstanding shares of our
    convertible preferred stock into 51,515,582 shares of our
    common stock, which will become effective upon the closing of
    this offering; and
•
the underwriters do not exercise their option to purchase up
    to                      shares
    of our common stock to cover over-allotments.
The number of shares of our common stock to be outstanding
immediately after this offering excludes:
•
6,716,550 shares of our common stock issuable upon exercise
    of options outstanding as of December 31, 2004, at a
    weighted average exercise price of $0.64 per share, of which
    options to purchase 2,004,888 shares were exercisable as of
    that date; and
•
1,133,450 shares of our common stock available for future
    grant under the Valera Pharmaceuticals, Inc. Equity Incentive
    Plan as of December 31, 2004.
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Table of Contents
SUMMARY FINANCIAL DATA
The following tables set forth our summary financial data for
the three years ended December 31, 2004 and as of
December 31, 2004, which have been derived from our audited
financial statements included elsewhere in this prospectus. It
is important that you read this information together with
"Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Risk
Factors" and our financial statements and the related notes
and schedule to these financial statements beginning on
page F-1 of this prospectus. The historical results
presented below are not necessarily indicative of results to be
expected in any future periods.
Year Ended December 31,
2002
2003
2004
(Restated)
(1)
Net product sales
$
15,006
$
7,353
$
5,511,286
Licensing revenue
—
—
134,636
Total net revenue
15,006
7,353
5,645,922
Operating costs and expenses:
Cost of product sales
—
—
608,150
Research and development
4,319,709
5,229,529
6,375,819
Selling and marketing
269,633
509,514
5,025,038
General and administrative
1,324,378
1,838,101
5,897,435
Total operating expenses
5,913,720
7,577,144
17,905,442
Loss from operations
(5,898,714
)
(7,569,791
)
(12,260,520
)
Interest income (expense), net
15,919
13,134
(6,152
)
Loss before income taxes
(5,882,795
)
(7,556,657
)
(12,266,672
)
Benefit for income taxes
—
—
(243,618
)
Net loss
(5,882,795
)
(7,556,657
)
(12,023,054
)
Deemed
    dividend
(1)
—
(1,139,535
)
(5,860,465
)
Net loss attributable to common stockholders
$
(5,882,795
)
$
(8,696,192
)
$
(17,883,519
)
Basic and diluted net loss attributable to common shareholders
    per share
$
(0.59
)
$
(0.87
)
$
(1.79
)
Weighted average shares outstanding — basic and diluted
10,000,000
10,000,000
10,000,000
Unaudited pro forma basic and diluted net loss per
    share
(2)
$
(0.40
)
Unaudited pro forma weighted average shares outstanding basic
    and diluted
44,206,980
As of December 31, 2004
Pro Forma
Actual
Pro Forma
(3)
as Adjusted
(4)
Balance Sheet Data:
Cash and cash equivalents
$
5,052,643
$
5,052,643
$
Working capital
8,306,324
8,306,324
Total assets
13,323,193
13,323,193
Long-term capital lease obligations and convertible preferred
    stock
39,942,188
17,193
Accumulated deficit
(38,317,116
)
(38,317,116
)
Total stockholders' (deficit) equity
(29,886,559
)
10,038,436
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(1)
We have determined that in connection with the issuance of our
    series B convertible preferred stock, certain anti-dilution
    provisions in our series A convertible preferred stock were
    activated. Because the shares of series B convertible
    preferred stock were sold at a price below the price that the
    shares of series A convertible preferred stock were sold,
    the conversion price and conversion ratio of the series A
    convertible preferred stock were adjusted in accordance with the
    original terms of that issuance when each tranche of
    series B convertible preferred stock was issued. These
    adjustments to the conversion price and the resulting conversion
    ratio resulted in deemed dividends being afforded to the holders
    of the series A convertible preferred stock. The total
    deemed dividend was not originally recorded in our 2003
    financial statements, but such statements have been restated to
    reflect this deemed dividend.
(2)
The pro forma net loss per share information is computed using
    the weighted average number of common shares outstanding, after
    giving pro forma effect to the automatic conversion of all
    outstanding shares of our convertible preferred stock into
    shares of common stock effective upon the completion of this
    offering, as if the conversion had occurred at the date of the
    original issuance.
(3)
The pro forma balance sheet information gives effect to the
    automatic conversion of all outstanding shares of our
    convertible preferred stock into an aggregate of
    51,515,582 shares of common stock upon the completion of
    this offering.
(4)
The pro forma as adjusted balance sheet information gives
    further effect to the sale of shares of common stock in this
    offering at an assumed initial public offering price of
    $           per
    share, which is the midpoint of the range set forth on the cover
    of this prospectus, after deducting underwriting discounts and
    commission and estimated offering expenses to be paid by us.
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Table of Contents
RISK FACTORS
You should carefully consider the risk factors described
below and all other information contained in this prospectus,
including our historical financial statements and related notes
and schedule, before you decide to invest in our common stock.
If any of the following risk factors, as well as other risks and
uncertainties that are not currently known to us or that we
currently believe are not material, actually occur, our
business, financial condition and results of operations could be
materially and adversely affected. In that case, the trading
price of our common stock could decline, and you may lose part
or all of your investment.
Risks Related to Our Business
We are largely dependent on the success of Vantas, our
    first product to be approved for commercial sale by the FDA, and
    we cannot be certain that we will be able to successfully
    commercialize Vantas.
We have invested and will invest a significant portion of our
time and resources in the commercialization of Vantas, which was
approved for commercial use by the FDA in October 2004. The
commercial success of Vantas is dependent on many factors,
including building a focused sales force, generating commercial
sales, gaining acceptance of Vantas by patients and the medical
community, and obtaining reimbursement from third party payors.
All of our product revenues to date have been generated solely
from sales of Vantas. Until our product candidates are approved
for commercial use, our only source of revenue will be
associated with Vantas sales. If we are unable to successfully
commercialize Vantas, we may be required to cease or reduce our
operations.
We have a history of operating losses and may not achieve
    profitability.
The extent of our future operating losses and timing of
profitability is highly uncertain, and we may never achieve
profitability. Our product development and clinical activities
will require significant continuing expenditures. Vantas is our
only product that has been approved for commercial use by the
FDA and that may generate any significant revenues. Since
inception we have incurred operating losses, and as of
December 31, 2004, we had an accumulated deficit of
approximately $38.3 million. We expect to incur additional
operating losses and capital expenditures and anticipate that
our expenses will increase in the foreseeable future as we
expand our sales of Vantas, continue our product development and
clinical research, acquire or in-license other pharmaceutical
products and expand our infrastructure.
We have limited sales, marketing, and distribution
    experience and may be unable to successfully commercialize our
    products.
We have limited experience in marketing, selling, and
distributing our products in the U.S. and abroad. To achieve
commercial success, we must build on our current marketing and
sales force or contract with other parties, including
collaborators, to perform these services for us. We may not be
able to negotiate favorable distribution or marketing
arrangements. To the extent that we enter into co-promotion or
other arrangements, any revenues we receive will depend upon the
efforts of third parties which may not be successful and are
only partially within our control. We will be competing with
companies that have experienced and well-funded marketing and
sales operations. The failure to adequately sell and distribute
Vantas or our product candidates, if approved, could have a
material adverse effect on our business, financial condition and
results of operations.
We are dependent on single suppliers for certain raw
    materials and services that are necessary for the manufacture of
    our Hydron implants. If any of these suppliers fail or are
    unable to perform in a timely and satisfactory manner, we may be
    unable to manufacture Vantas or some of our product candidates,
    which could delay the sale of Vantas and hinder research and
    development of our product candidates that use Hydron
    Technology.
We currently rely on single suppliers for certain raw materials
and services for the manufacture of our Hydron implants.
Although we have identified alternate sources of raw materials
and services, these raw materials and services may not be
immediately available to us. Further, even if raw materials are
immediately available, they must first meet our internal
specifications. Consequently, if any of our suppliers are unable
or unwilling to supply us with raw materials in sufficient
quantities with the correct specifications, or provide
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services on commercially acceptable terms, we may not be able to
manufacture Vantas or our product candidates in a timely manner
or at all, which could delay the production or sale of Vantas
and hinder the research and development of some of our product
candidates. Our inability to obtain raw materials and services
for the manufacture of our implants may force us to cease or
reduce operations.
We may not be able to obtain additional capital that may
    be necessary for growth and market penetration or to continue
    our operations.
We may need to raise additional funds through public or private
debt or equity financings in order to fund our operations,
expand our sales and marketing capabilities, develop product
candidates, obtain FDA approval of our product candidates and
continue commercial development. Financings may be on terms that
are dilutive or potentially dilutive to our stockholders. Any
debt financing we enter into may involve incurring significant
interest expense and include covenants that restrict our
operations. If we raise additional funds through collaborations
and licensing arrangements, it may be necessary to relinquish
some rights to our technologies, product candidates or products,
or grant licenses on terms that are not favorable to us. Our
ability to raise additional funds will depend on financial,
economic and market conditions and other factors, many of which
are beyond our control. We may not be able to obtain financing
on terms acceptable to us or at all. If financing is
insufficient or unavailable, we will have to modify our growth
and marketing strategies and scale back operations by delaying,
reducing the scope of, or eliminating one or more of our planned
development, commercialization or expansion activities. This may
negatively affect our ability to commercialize Vantas and
develop and bring new products to market, which could have a
material adverse effect on our business, financial condition and
results of operations.
Our future capital requirements may be significantly greater
than we expect and depend on many factors, including:
•
costs associated with conducting pre-clinical and clinical
    testing;
•
costs associated with commercializing Vantas and other products
    we may develop, including expanding sales and marketing
    functions;
•
costs of establishing arrangements for manufacturing;
•
costs of acquiring new pharmaceutical products and drug delivery
    systems;
•
payments required under our current and any future license
    agreements and collaborations;
•
costs, timing and outcome of regulatory reviews;
•
costs of obtaining, maintaining and defending patents on
    proprietary technology; and
•
costs of increased general and administrative expenses.
The successful commercialization of Vantas and any other
    products we develop will depend on obtaining coverage and
    reimbursement for patient use of these products from third party
    payors and Medicare/Medicaid.
Sales of pharmaceutical products largely depend on the
reimbursement of patients' medical expenses by government
healthcare programs and private health insurers. These third
party payors control healthcare costs by limiting both coverage
and the level of reimbursement for healthcare products. Third
party payors are increasingly challenging the price and
examining the cost effectiveness of medical products and
services. The levels at which government authorities and third
party payors reimburse patients for the price they pay for
Vantas and other products we may develop could affect the extent
to which we are able to commercialize these products. Our
current sales of Vantas may be supported, in part, by favorable
reimbursement rates, which we expect will decrease in the second
half of 2005. In addition, significant uncertainty generally
exists as to the reimbursement status of newly approved
healthcare products. Our ability to achieve acceptable levels of
reimbursement of product candidates will affect our ability to
successfully commercialize, and attract collaborative partners
to invest in the development of our product candidates. Vantas
is currently eligible for
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insurance reimbursement coverage. Reimbursement may not be
available for any other products that we develop and
reimbursement or coverage levels may reduce the demand for, or
the price of, Vantas or any other products that we may develop.
If we cannot maintain coverage for Vantas and obtain adequate
reimbursement for other products we develop, the market for
those products may be limited.
In both the U.S. and certain foreign jurisdictions, there have
been a number of legislative and regulatory proposals in recent
years to change the healthcare system in ways that could impact
our ability to profitably sell Vantas and any other products
that we develop. These proposals include prescription drug
benefit proposals for Medicare beneficiaries and measures that
would limit or prohibit payments for certain medical treatments
or subject the pricing of drugs to government control.
Legislation creating a prescription drug benefit and making
certain changes in Medicaid reimbursement has recently been
enacted by Congress and signed by the President. Additionally,
Medicare regulations implementing the prescription drug benefit
have recently been published. These and other regulatory and
legislative changes or proposals may affect our ability to raise
capital, obtain additional collaborators and market Vantas and
any other products that we may develop. In addition, in many
foreign countries, particularly the countries of the European
Union, the pricing of prescription drugs is subject to
government control. If our products are or become subject to
government regulation that limits or prohibits payment for our
products, or that subject the price of our products to
governmental control, our ability to sell Vantas and other
products we develop in commercially acceptable quantities at
profitable prices may be harmed.
If
products utilizing our technology fail to gain market
acceptance, we may be unable to generate significant
revenue.
Even if clinical trials demonstrate the safety and efficacy of
products developed utilizing our technology and all regulatory
approvals are obtained, such products may not gain market
acceptance among physicians, patients, third party payors or the
medical community. The current method of administration for our
product candidates in late-stage development is implantation,
which is generally less well received by patients than injection
therapy. The degree of market acceptance of any product
employing our technology will depend on a number of factors,
including:
•
establishment and demonstration of clinical efficacy and safety;
•
cost-effectiveness;
•
adequate reimbursement by third parties;
•
relative convenience and ease of administration;
•
timing of market introduction of competitive products;
•
alternative treatment methods; and
•
marketing and distribution support.
If our products do not achieve significant market acceptance, we
may be unable to generate significant revenue, which could have
a material adverse effect on our business, financial condition
and results of operations.
Our failure to recruit, retain, and motivate qualified
    management and scientific personnel could adversely affect
    us.
Our success depends, in part, on our continued ability to
attract, retain and motivate highly qualified management,
scientific and clinical and sales and marketing personnel. We
are substantially dependent on our senior management and key
scientific and technical personnel, particularly David S.
Tierney, M.D., Matthew L. Rue, III, Pete J. Perron and
Petr F. Kuzma, each of whose services are critical to the
successful implementation of our development, regulatory
strategies and commercialization. We will need to expand our
employee base as we continue to commercialize Vantas and develop
our product candidates. The loss of the services of any member
of our senior management, scientific or technical staff may
significantly delay or
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prevent the achievement of drug development and other business
objectives, and could have a material adverse effect on our
business, operating results and financial condition. We may not
be able to recruit and retain qualified personnel in the future
due to intense competition for personnel among pharmaceutical
businesses, and our failure to do so could delay or curtail our
product development efforts, impair our ability to execute our
business strategy and adversely affect us. We also rely on
consultants and advisors to assist us with research and
development. All of our consultants and advisors are either
self-employed or employed by other organizations, and they may
have conflicts of interest or other commitments, such as
consulting or advisory contracts with other organizations, that
may affect their ability to contribute to us, which could have a
material adverse effect on our business, financial condition and
results of operations.
We face substantial competition and our competitors may
    discover, develop or commercialize products similar to ours
    before or more successfully than us.
The biotechnology and pharmaceutical industries are very
competitive. In particular, competition for the development and
marketing of urological and endocrine pharmaceutical products is
intense and is expected to increase. Many of our competitors
have substantially greater financial and other resources, larger
research and development staffs and more experience developing
products, obtaining FDA and other regulatory approval and
manufacturing and marketing products. We compete against all
pharmaceutical companies that manufacture or market LHRH agonist
products. In addition, we compete against biotechnology
companies, universities, government agencies, and other research
institutions in the development of urological and endocrine
products, technologies and processes that are, or in the future
may be, the basis for competitive commercial products.
In particular, we compete against the following LHRH agonist
products for the palliative treatment of advanced prostate
cancer: TAP Pharmaceutical Products' Lupron and
Sanofi-Aventis' Eligard, both multiple injection
formulations that deliver leuprolide; AstraZeneca's
Zoladex, a biodegradable rod that delivers goserelin for up to
three months; and Bayer Pharmaceuticals' Viadur, a rigid
metal implant that releases leuprolide over a 12-month period.
With respect to our endocrine pharmaceuticals in late-stage
development for the treatment of central precocious puberty and
acromegaly, our competitors currently include TAP Pharmaceutical
Products' Lupron Depot-PED, Novartis' Sandostatin
injections and Sandostatin LAR Depots and Pfizer's Somavert.
Our competitors may discover, develop or commercialize products
similar to ours before or more successfully than us and may
compete with us in establishing clinical trial sites and patient
registration for clinical trials, as well as in acquiring
technologies and technology licenses complementary to our
programs or advantageous to our business. In addition, there may
be product candidates of which we are not aware at an earlier
stage of development that may compete with our product
candidates. If any of them are successfully developed and
approved, they could compete directly with our product
candidates. This could result in reduced sales and pricing
pressure on any similar products that we develop, which in turn
would reduce our ability to generate revenue and could have a
material adverse effect on our business, financial condition and
results of operations.
Our sales of Vantas and any other products we may develop
    could suffer from competition by generic products.
Although we have proprietary protection for Vantas and other
products we are developing, we could face competition from
generic substitutes of these products if generics are developed
by other companies and approved by the FDA. Because generic
manufacturers are not exposed to development risks for such
generic substitutes, these manufacturers can capture market
share by selling generic products at lower prices, which can
reduce the market share held by the original product.
Competition from the sale of generic products may cause a
decrease in revenue, and could have a material adverse effect on
our business, financial condition and results of operations.
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We may encounter difficulties managing our growth, which
    could adversely affect our results of operations.
In connection with our commercial launch of Vantas, we may
experience rapid and significant growth in the number of our
employees and the scope of our operations. We currently have
approximately 40 employees devoted to sales and marketing, and
we expect to hire approximately 10 additional employees in this
area. Our future financial performance and our ability to
commercialize Vantas and any other products that we develop and
to compete effectively will depend, in part, on our ability to
manage any future growth effectively. This growth and expansion
is expected to place a significant demand on our financial,
managerial and operational resources.
Our success in managing our growth will also depend on the
ability of our executive officers and senior management to
continue to implement and improve our operational, management
information and financial control systems and to expand, train
and manage our employee base. Our inability to manage growth
effectively could cause our operating costs to grow at a faster
pace than is currently anticipated and could have a material
adverse effect on our business, financial condition and results
of operations.
We face a risk of product liability claims and may not be
    able to obtain adequate insurance.
Our business exposes us to potential liability risks that may
arise from the clinical testing of our product candidates and
the manufacture and sale of Vantas and other products that we
may develop. Plaintiffs have received substantial damage awards
in some jurisdictions against pharmaceutical companies based
upon claims for injuries allegedly caused by the use of their
products. Such liability claims may be expensive to defend and
may result in large judgments against us. Although we have
liability insurance with a coverage limit of $10 million,
our insurance may not reimburse us, or this coverage may not be
sufficient to cover claims that may be made against us. In
addition, if we are no longer able to maintain this coverage or
have to obtain additional coverage, we may not be able to obtain
liability insurance on acceptable terms or at all. Whether or
not we are ultimately successful in any product liability
litigation, such litigation could consume substantial amounts of
our financial and managerial resources and could result in:
•
significant awards against us;
•
substantial litigation costs;
•
recall of the product;
•
injury to our reputation; and
•
withdrawal of clinical trial participants;
all of which could have a material adverse effect on our
business, financial condition and results of operations.
Because we have operated as a private company, we have no
    experience attempting to comply with public company obligations,
    including recently enacted changes in securities laws and
    regulations; attempting to comply with these requirements will
    increase our costs and require additional management resources
    and we still may fail to comply.
We are a small company with limited resources. We have operated
as a private company, not subject to many of the requirements
applicable to public companies. The number and qualifications of
our finance and accounting staff are consistent with those of a
private company. While we plan to expand our staff if we become
public, we may encounter substantial difficulty attracting
qualified staff with requisite experience due to the high level
of competition for experienced financial professionals.
As a public reporting company, we will need to comply with the
Sarbanes-Oxley Act of 2002 and the related rules and regulations
of the SEC, including expanded periodic reports, disclosures and
accelerated reporting requirements and more complex accounting
rules.
As directed by Section 404 of the Sarbanes-Oxley Act of
2002, the SEC adopted rules requiring public companies to
include a report of management on the company's internal
controls over financial reporting in
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their annual reports on Form 10-K. In addition, the public
accounting firm auditing the company's financial statements
must attest to and report on management's assessment of the
effectiveness of the company's internal controls over
financial reporting. This requirement will first apply to our
annual report on Form 10-K for our fiscal year ending
December 31, 2006. If we are unable to conclude that we
have effective internal controls over financial reporting or, if
our independent auditors are unable to provide us with an
unqualified report as to the effectiveness of our internal
controls over financial reporting as of December 31, 2006
and future year ends as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in
the reliability of our financial statements, which could result
in a decrease in the value of our common stock.
Risks Related to Clinical Trials and Other Regulatory
Matters
If our clinical trials are unsuccessful, significantly
    delayed, or if we do not complete our clinical trials, we may
    not be able to commercialize our product candidates.
We must provide the FDA and similar foreign regulatory
authorities with pre-clinical and clinical data to demonstrate
that our product candidates are safe and effective for each
indication before they can be approved for commercialization.
The pre-clinical testing and clinical trials of any product
candidates that we develop must comply with the regulations of
numerous federal, state and local government authorities in the
U.S., principally the FDA, and by similar agencies in other
countries. Clinical development is a long, expensive and
uncertain process and is subject to delays. We may encounter
delays or rejections for various reasons, including our
inability to enroll enough patients to complete our clinical
trials.
It may take several years to complete the testing of a product,
and failure can occur at any stage of development, for many
reasons, including:
•
interim results of pre-clinical or clinical studies does not
    necessarily predict their final results, and acceptable results
    in early studies might not be seen in later studies;
•
product candidates that appear promising at early stages of
    development may ultimately fail because the products may be
    ineffective, may be less effective than competitors'
    products or may cause harmful side effects;
•
any pre-clinical or clinical test may fail to produce results
    satisfactory to the FDA or foreign regulatory authorities;
•
pre-clinical or clinical data can be interpreted in different
    ways, which could delay, limit or prevent regulatory approval;
•
negative or inconclusive results from a pre-clinical study or
    clinical trial or adverse medical events during a clinical trial
    could cause a pre-clinical study or clinical trial to be
    repeated or a program to be terminated, even if other studies or
    trials relating to the program are successful;
•
the FDA can place a clinical hold on a trial if, among other
    reasons, it finds that patients enrolled in the trial are or
    would be exposed to an unreasonable and significant risk of
    illness or injury;
•
we may encounter delays or rejections based on changes in
    regulatory agency policies during the period in which we are
    developing a product candidate or the period required for review
    of any application for regulatory agency approval;
•
our clinical trials may not demonstrate the safety and efficacy
    of any product candidates or result in marketable products;
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•
the FDA may change its approval policies or adopt new
    regulations that may negatively affect or delay our ability to
    bring a product candidate to market; and
•
a product candidate may not be approved for all the indications
    which we request.
The development and approval process may take many years,
    require substantial resources and may never lead to the approval
    of a product. With the exception of Vantas, we do not have, and
    may never obtain, the regulatory approvals we need to market our
    product candidates. Our failure to obtain, or delays in
    obtaining, regulatory approvals would have a material adverse
    effect on our business, financial condition and results of
    operations.
Product candidates are subject to extensive and rigorous
government regulation by the FDA, other regulatory agencies, and
their respective foreign equivalents. The FDA regulates the
research, development, pre-clinical and clinical testing,
manufacture, safety, effectiveness, record keeping, reporting,
labeling, storage, approval, advertising, promotion, sale,
distribution, import and export of pharmaceutical products. Any
of our products marketed abroad will also be subject to
extensive regulation by foreign governments, whether or not we
have obtained FDA approval for a given product and its uses.
Government regulation substantially increases the cost of
researching, developing, manufacturing and selling
pharmaceutical products. The regulatory review and approval
process, which includes pre-clinical testing and clinical trials
of each product candidate, is lengthy, expensive and uncertain.
We must obtain regulatory approval for each product we intend to
market, and the manufacturing facilities used for the products
must be inspected and meet legal requirements. Securing
regulatory approval requires the submission of extensive
pre-clinical and clinical data and other supporting information
for each proposed therapeutic indication in order to establish
the product's safety, efficacy, potency and purity for each
intended use. Moreover, approval policies or regulations may
change. We will not be able to commercialize our product
candidates until we obtain FDA approval in the U.S. or
approval by comparable authorities in other countries. The
development and approval process takes many years, requires
substantial resources and may never lead to the approval of a
product. We received FDA approval for the commercial sale of
Vantas in October 2004. Approval of any of our product
candidates is not anticipated until 2007 and thereafter. Failure
to obtain or delays in obtaining, regulatory approvals may:
•
adversely affect the commercialization of any products that we
    develop;
•
impose additional costs on us;
•
diminish any competitive advantages that we may attain; and
•
adversely affect our receipt of revenues or royalties.
Even if we receive regulatory approval for our product
    candidates, our approval may be limited and, we will be subject
    to significant ongoing regulatory obligations and
    oversight.
Even if we are able to obtain regulatory approval for a
particular product, the approval may limit the indicated uses
for the product, may otherwise limit our ability to promote,
sell and distribute the product, may require that we conduct
costly post-marketing surveillance and may require that we
conduct ongoing post-marketing studies. Material changes to an
approved product, such as manufacturing changes or revised
labeling, may require further regulatory review and approval.
Once obtained, any approvals may be withdrawn for a number of
reasons, including the later discovery of previously unknown
problems with the product. If we or our contract manufacturers
fail to comply with applicable regulatory requirements at any
stage during the regulatory process, such noncompliance could
result in:
•
refusals or delays in the approval of applications or
    supplements to approved applications;
•
refusal of a regulatory authority, including the FDA, to review
    pending market approval applications or supplements to approved
    applications;
•
warning letters;
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•
fines;
•
import or export restrictions;
•
product recalls or seizures;
•
injunctions;
•
total or partial suspension of clinical trials or production;
•
civil penalties;
•
withdrawals of previously approved marketing applications or
    licenses;
•
recommendations by the FDA or other regulatory authorities
    against entering into governmental contracts with us; or
•
criminal prosecutions.
The regulatory approval process outside the
    U.S. varies depending on foreign regulatory requirements,
    and failure to obtain regulatory approval in foreign
    jurisdictions would prevent the marketing of our products
    abroad.
We intend to also market our products outside of the
U.S. To market our products in the European Union and many
other foreign jurisdictions, we must obtain separate regulatory
approvals and comply with numerous and varying regulatory
requirements. Approval of a product by the comparable regulatory
authorities of foreign countries must still be obtained prior to
manufacturing or marketing that product in those countries. The
approval procedure varies among countries and can involve
additional testing, and the time required to obtain approval may
differ from that required to obtain FDA approval. The foreign
regulatory approval process includes all of the risks associated
with obtaining FDA approval set forth above, and approval by the
FDA does not ensure approval by the regulatory authorities of
any other country, nor does the approval by foreign regulatory
authorities in one country ensure approval by regulatory
authorities in other foreign countries or the FDA. We may not be
able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any foreign
market. If we fail to comply with these regulatory requirements
or obtain and maintain required approvals, our target market
will be reduced and our ability to generate revenue will be
adversely affected.
We rely on third parties to conduct certain of the
    clinical trials for our product candidates, and if they do not
    perform their obligations to us, we may not be able to obtain
    regulatory approvals for our product candidates.
We design the clinical trials for our product candidates, but we
rely on academic institutions, corporate partners, contract
research organizations and other third parties to assist us in
managing, monitoring and otherwise carrying out these trials.
Accordingly, we may have less control over the timing and other
aspects of these clinical trials than if they conducted them
entirely on our own. We are currently conducting the clinical
trials for VP002 (histrelin) for CPP, however, the data
management will be contracted to an outside data management
firm. We are also conducting the clinical trials for VP003
(octreotide) in Brazil, however, we have employed a local
contract research organization to monitor the trials for us, and
we will contract with a third party to handle the data
management. Although we rely on these third parties to manage
the data from these clinical trials, we are responsible for
confirming that each of our clinical trials is conducted in
accordance with its general investigational plan and protocol.
Moreover, FDA and foreign regulatory agencies require us to
comply with regulations and standards, commonly referred to as
good clinical practice, for conducting, recording and reporting
the results of clinical trials to assure that the data and
results are credible and accurate and that the trial
participants are adequately protected. Our reliance on third
parties does not relieve us of these responsibilities and
requirements, and we may fail to obtain regulatory approval for
our product candidates, if these requirements are not met.
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As manufacturers of our products, we are subject to
    regulatory requirements. If we do not comply with such
    requirements, the development and sales of our products and our
    financial performance may be materially harmed.
Pharmaceutical products are required to be manufactured under
current good manufacturing practice, or cGMP. Before
commercializing a new product, manufacturers must demonstrate
compliance with the applicable cGMP regulations, which include
quality control, and quality assurance requirements, as well as
the maintenance of extensive records and documentation.
Manufacturing facilities are subject to ongoing periodic
inspection by the FDA and corresponding foreign and state
authorities, including unannounced inspections, and must be
licensed before they can be used in commercial manufacturing for
products generated through the use of their technology. In
addition, cGMP requirements are constantly evolving, and new or
different requirements may apply in the future. After regulatory
approvals are obtained, the subsequent discovery of previously
unknown problems or the failure to maintain compliance with
existing or new regulatory requirements may result in
restrictions on the marketing of a product, withdrawal of the
product from the market, seizures, the shutdown of manufacturing
facilities, injunctions, monetary fines and civil or criminal
sanctions.
We may also encounter problems with the following:
•
production yields;
•
shortages of qualified personnel;
•
compliance with FDA regulations, including the demonstration of
    purity and potency;
•
changes in FDA requirements;
•
controlling production costs; and
•
development of advanced manufacturing techniques and process
    controls.
In addition, we will be required to register our manufacturing
facilities with the FDA and other regulatory authorities. The
facilities will be subject to inspections confirming compliance
with cGMP or other regulations. If we fail to maintain
regulatory compliance, the FDA can impose regulatory sanctions
including, among other things, refusal to approve a pending
application for a new drug product, or revocation of a
pre-existing approval, which could have a material adverse
effect on our business, financial condition and results of
operations.
Risks Related to Intellectual Property
Our success depends on the protection of our intellectual
    property rights, and our failure to secure these rights would
    materially harm our business.
We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent that our
proprietary rights are covered by valid and enforceable patents
or are effectively maintained as trade secrets. We protect our
proprietary position by filing U.S. and foreign patent
applications related to our proprietary technology, inventions
and improvements that are important to the development of our
business. We may not be able to obtain patent protection for our
pending patent applications, those we may file in the future, or
those we may license from third parties. Moreover, patents
issued or that may be issued or licensed may not be enforceable
or valid or may expire prior to the commercialization of our
product candidates. The patent position of a pharmaceutical
company involves complex legal and factual questions and,
therefore, enforceability or validity cannot be predicted with
certainty. Patents, if issued, may be challenged, invalidated or
circumvented. Thus, any patents that we own or license from
third parties may not provide sufficient protection against our
competitors. Also, patent rights may not provide us with
proprietary protection or competitive advantages against
competitors with similar technology. Further, the laws of
foreign countries may not protect our intellectual property
rights to the same extent as do the laws of the U.S.
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If we are unable to protect the confidentiality of our
    proprietary information and know-how, our competitive position
    would be impaired and our business could be adversely
    affected.
In addition to patent protection, we also rely on the protection
of trade secrets, know-how and confidential and proprietary
information. To maintain the confidentiality of trade secrets
and proprietary information, we have entered into
confidentiality agreements with our employees, consultants and
collaborators upon the commencement of their relationships with
us. These agreements require that all confidential information
developed by the individual or made known to the individual by
us during the course of the individual's relationship with
us be kept confidential and not disclosed to third parties. Our
agreements with employees also provide that inventions conceived
by the individual in the course of rendering services to us
shall be our exclusive property. However, we may not obtain
these agreements in all circumstances, and individuals with whom
we have these agreements may not comply with the terms of these
agreements. In the event of unauthorized use or disclosure of
their trade secrets or proprietary information, these
agreements, even if obtained, may not provide meaningful
protection for our trade secrets or other confidential
information. Further, to the extent that our employees,
consultants or contractors use technology or know-how owned by
others in their work for us, disputes may arise as to the rights
in related inventions.
Adequate remedies may not exist in the event of unauthorized use
or disclosure of our confidential information. The disclosure of
our trade secrets would impair our competitive position and
could harm our business.
Our commercial success depends significantly on our
    ability to operate without infringing the patents and other
    proprietary rights of third parties.
Others may obtain patents that could limit our ability to use,
import, manufacture, market or sell products or impair our
competitive position. We cannot assure you that our products
and/or actions in developing or selling their products will not
infringe such patents. In the event our technologies infringe or
violate the proprietary rights of third parties, we may be
prevented from pursuing product development, manufacturing or
commercialization of our products that utilize such
technologies. Our failure to protect our patents or to obtain a
license to any technology that we may require have a material
adverse effect on our business, financial condition and results
of operations.
Protecting our intellectual property is expensive and time
    consuming and could harm our business.
Third parties may challenge the validity of our patents and
other intellectual property rights, resulting in costly
litigation or other time-consuming and expensive proceedings,
which could deprive us of valuable rights. If we become involved
in any intellectual property litigation, interference or other
judicial or administrative proceedings, we will incur
substantial expenses and the diversion of financial resources
and technical and management personnel. An adverse determination
may subject us to significant liabilities or require us to seek
licenses that may not be available from third parties on
commercially favorable terms, if at all. Further, if such claims
are proven valid, through litigation or otherwise, we may be
enjoined from marketing, selling or licensing the affected
products and proprietary and intellectual property rights, and
we may be required to pay financial damages, which could have a
material adverse effect on our business, financial condition and
results of operations.
Risks Related to This Offering and Our Common Stock
There has been no prior market for our common stock, and
    it may trade at prices below the initial public offering
    price.
Prior to this offering, there has been no public market for our
common stock. We cannot predict the extent to which a trading
market for our common stock will develop or be sustained after
this offering. The initial public offering price will be
determined by negotiations between us and the representatives of
the underwriters based on factors that may not be indicative of
future performance, and may not bear any relationship to the
price at which our common stock will trade upon completion of
this offering. You may be unable to sell your shares of common
stock at or above the initial public offering price.
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The trading price of the shares of our common stock could
    be highly volatile.
The trading price of the shares could be highly volatile in
response to various factors, many of which are beyond our
control, including:
•
developments concerning Vantas or any of our product candidates;
•
announcements of technological innovations by us or our
    competitors;
•
new products introduced or announced by us or our competitors;
•
changes in reimbursement levels;
•
changes in financial estimates by securities analysts;
•
actual or anticipated variations in operating results;
•
expiration or termination of licenses, research contracts or
    other collaboration agreements;
•
conditions or trends in the regulatory climate and the
    biotechnology and pharmaceutical industries;
•
intellectual property, product liability or other litigation
    against us;
•
changes in the market valuations of similar companies; and
•
sales of shares of our common stock, particularly sales by our
    officers, directors and significant stockholders.
In addition, equity markets in general, and the market for
biotechnology and life sciences companies in particular, have
experienced substantial price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of companies traded in those markets. In addition,
changes in economic conditions in the U.S., Europe or globally,
could impact upon our ability to grow profitably. Adverse
economic changes are outside our control and may result in
material adverse impacts on the business or its results. These
broad market and industry factors may materially affect the
market price of the shares, regardless of our development and
operating performance. In the past, following periods of
volatility in the market price of a company's securities,
securities class-action litigation has often been instituted
against that company. Such litigation, if instituted against us
could cause us to incur substantial costs and divert
management's attention and resources, which could have a
material adverse effect on our business, financial condition and
results of operations.
You will experience immediate and substantial dilution as
    a result of this offering and may experience additional dilution
    in the future.
If you purchase common stock in this offering, you will pay more
for your shares than the amounts paid by existing stockholders
for their shares. As a result, you will incur immediate and
substantial dilution of
$           per
share, representing the difference between our pro forma net
tangible book value per share after giving effect to this
offering and the initial public offering price. In addition,
purchasers of shares of our common stock in this offering will
have contributed approximately      %
of the aggregate price paid by all purchasers of our stock, but
will own only approximately      % of
the shares of our common stock outstanding after this offering
based on the number of shares of our common stock outstanding as
of December 31, 2004. In the past, we issued options to
acquire shares of common stock at prices significantly below the
initial public offering price. To the extent these options are
ultimately exercised, you will sustain future dilution. We may
also acquire or license other technologies or finance strategic
alliances by issuing equity, which may result in additional
dilution to our stockholders.
The ownership interests of our officers, directors and
    largest stockholders could conflict with the interests of our
    other stockholders.
Following completion of this offering, our directors, executive
officers and holders of 5% or more of our outstanding common
stock will beneficially own
approximately      % of our common
stock (after giving effect
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to the conversion of all outstanding shares of our convertible
preferred stock, but assuming no exercise of the
underwriters' over-allotment option and no exercise of
outstanding options). As a result, these stockholders, acting
together, will be able to significantly influence all matters
requiring approval by our stockholders, including the election
of directors and approval of mergers or other significant
corporate transactions. The interests of this group of
stockholders may not always coincide with our interests or the
interests of other stockholders.
Our use of the offering proceeds may not yield a favorable
    return on your investment.
We expect to use the net proceeds from this offering to expand
our sales and marketing capabilities, fund our research and
development activities, expand our manufacturing capabilities
and for general corporate purposes. In addition, we may use a
portion of the net proceeds to acquire businesses, products or
technologies that are complementary to our current or future
business and product lines. Our management has broad discretion
over how these proceeds are used and could spend the proceeds in
ways with which you may not agree. Pending the use of the
proceeds in this offering, we may invest them. However, the
proceeds may not be invested effectively or in a manner that
yields a favorable or any return, and consequently, this could
result in financial losses that could have a material adverse
effect on our business, cause the price of our common stock to
decline and delay the development of our product candidates.
Delaware law and our amended and restated certificate of
    incorporation and amended and restated bylaws contain provisions
    that could delay and discourage takeover attempts that
    stockholders may consider favorable.
Certain provisions of our amended and restated certificate of
incorporation, or certificate of incorporation, and amended and
restated bylaws, or bylaws, and applicable provisions of
Delaware corporate law may make it more difficult for or prevent
a third party from acquiring control of us or changing our board
of directors and management. These provisions include:
•
our board of directors has the ability to issue preferred stock
    with voting or other rights or preferences;
•
only the chairman of our board of directors, our president,
    secretary, any two or more directors, or stockholders who
    together own of record a majority of the outstanding stock of
    all classes entitled to vote upon written request, may call
    special meetings of our stockholders; and
•
our stockholders must comply with advance notice procedures in
    order to nominate candidates for election to our board of
    directors or to place stockholders' proposals on the agenda
    for consideration at meetings of stockholders.
Any delay or prevention of a change of control transaction or
changes in our board of directors or management could deter
potential acquirors or prevent the completion of a transaction
in which our stockholders could receive a substantial premium
over the then current market price for their shares.
Future sales of our common stock may depress our stock
    price.
Persons who were our stockholders prior to the sale of shares in
our initial public offering continue to hold a substantial
number of shares of our common stock that they will be able to
sell in the public market in the near future. Significant
portions of these shares are held by a small number of
stockholders. Sales by our current stockholders of a substantial
number of shares, or the expectation that such sales may occur,
could significantly reduce the market price of our common stock.
Moreover, the holders of approximately 61,515,582 shares of
our common stock, including shares issuable upon conversion of
our outstanding preferred stock, will have rights, subject to
certain conditions, to require us to file registration
statements to permit the resale of their shares in the public
market or to include their shares in registration statements
that we may file for ourselves or other stockholders.
The holders of
approximately                      shares
of our outstanding common stock as of December 31, 2004
have agreed with the underwriters of our initial public offering
to be bound by a 180-day lock-up agreement that generally
prohibits these holders from selling or transferring their stock
until the end of the
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180-day period, subject to specified exceptions. If we issue an
earnings release or material news or a material event relating
to us occurs during the 15 calendar days plus 3 business days
before the last day of the lock-up period, or if prior to the
expiration of the lock-up period, we announce that we will
release earnings results during the 16 days following the
last day of the lock-up period, the restrictions provided in the
lock-up agreements will continue to apply until 18 days
after the issuance of the earnings release or the occurrence of
material news or a material event. At any time and without
public notice, UBS Securities LLC and Banc of America Securities
LLC may in their sole discretion release all or some of the
securities from these lock-up agreements. If the restrictions of
the lock-up agreements are waived, shares of our common stock
will be available for sale into the market, subject only to
applicable securities rules and regulations, which may cause our
stock price to decline.
Our quarterly financial results are likely to fluctuate
    significantly because our sales prospects are uncertain.
Our quarterly operating results are difficult to predict and may
fluctuate significantly from period to period. The level of our
revenues, if any, and results of operations at any given time
will be based primarily on the following factors:
•
success of the commercial launch of Vantas and any other product
    candidates that may be approved;
•
changes in our ability to obtain FDA approval for our other
    product candidates;
•
results of our clinical trials;
•
timing of new product offerings, acquisitions, licenses or other
    significant events by us or our competitors;
•
regulatory approvals and legislative changes affecting the
    products we may offer or those of our competitors;
•
our ability to establish, grow and maintain a productive sales
    force;
•
demand and pricing of products we may offer;
•
physician and patient acceptance of Vantas and other products we
    may offer;
•
levels of third-party reimbursement for Vantas and other
    products we may offer;
•
interruption in the manufacturing or distribution of Vantas and
    other products we may offer; and
•
the effect of competing technological and market developments.
As we have just launched Vantas, our first product, it will be
difficult for us to forecast demand for Vantas and our product
candidates that may be approved with any degree of certainty,
and therefore, our sales prospects are uncertain. In addition,
we will be increasing our operating expenses as we expand our
commercial capabilities. Accordingly, we may experience
significant, unanticipated quarterly losses. Because of these
factors, our operating results in one or more future quarters
may fail to meet the expectations of securities analysts or
investors, which could cause our stock price to decline
significantly.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These
forward-looking statements are not historical facts but rather
are based on current expectations, estimates and projections
about our industry, our beliefs and our assumptions. Words such
as "anticipates," "expects,"
"intends," "plans," "believes,"
"seeks" and "estimates," and variations of
these words and similar expressions, are intended to identify
forward-looking statements. These statements are not guarantees
of future performance and are subject to risks, uncertainties
and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ
materially from those expressed, implied or forecasted in the
forward-looking statements. In addition, the forward-looking
events discussed in this prospectus might not occur. These risks
and uncertainties include, among others, those described in
"Risk Factors" and elsewhere in this prospectus. You
are cautioned not to place undue reliance on these
forward-looking statements. You should read this prospectus, and
the documents that we refer to in this prospectus and have filed
as exhibits to the registration statement of which this
prospectus is a part, with the understanding that actual future
results and events may be materially different from what we
currently expect.
The forward-looking statements included in this prospectus
reflect our views and assumptions only as of the date of this
prospectus. Except as required by law, we undertake no
obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
This prospectus also contains or refers to market data and
industry statistics, forecasts and projections that we obtained
from industry publications and publicly-available data. These
sources generally indicated that they have obtained their
information from sources believed to be reliable, but do not
guarantee the accuracy or completeness of their information. We
do not guarantee, and we have not independently verified this
information. Accordingly, investors should not place undue
reliance on this information.
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USE OF PROCEEDS
We will receive approximately
$          million
in net proceeds from the sale of our common stock in this
offering, assuming an initial public offering price of
$          ,
which is the midpoint of the range set forth on the cover of
this prospectus, after deducting underwriting discounts and
commissions and estimated offering expenses. If the underwriters
exercise their over-allotment option in full, we estimate that
our net proceeds will be approximately
$           million.
We currently expect to use the net proceeds of this offering as
follows:
•
approximately
    $           million
    to expand our sales and marketing capabilities;
•
approximately
    $           million
    to fund our research and development activities, including
    clinical trials;
•
approximately
    $           million
    to expand our manufacturing capabilities; and
•
approximately
    $           million
    for general corporate purposes.
In addition, we may use a portion of the net proceeds from this
offering to acquire products or technologies that are
complementary to our current or future business and product
lines, but we currently have no commitments, agreements, or
understandings relating to any of these types of transactions.
We believe that the net proceeds from this offering, together
with our existing cash, cash equivalents and short-term
investments, will be sufficient to meet our projected operating
requirements for at least the
next            months,
including our requirements related to the commercialization of
Vantas and further development of our product candidates.
The allocation of the net proceeds of this offering described
above represents our best current estimate of our projected
operating requirements. However, the exact amount and timing of
our expenditures will depend on several factors, including the
success of our commercialization activities and the progress of
our clinical trials and other development efforts as well as the
amount of cash used in our operations. Accordingly, our
management will have broad discretion in the application of the
net proceeds and investors will be relying on the judgment of
our management regarding the application of the proceeds of this
offering. We reserve the right to change the use of these
proceeds as a result of certain contingencies such as the
results of our commercialization activities, competitive
developments, opportunities to acquire or in-license products,
technologies or businesses and other factors.
Pending the uses described above, we plan to invest the net
proceeds of this offering in short- and medium-term,
interest-bearing obligations, investment-grade instruments,
certificates of deposit or direct or guaranteed obligations of
the U.S. government.
21
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DIVIDEND POLICY
We have not declared or paid any dividends to date. We currently
intend to retain future earnings, if any, to fund the
development and expansion of our business and do not anticipate
paying cash dividends on our common stock in the foreseeable
future. Any future determination to pay dividends will be at the
discretion of our board of directors and will depend on our
financial condition, results of operations, capital
requirements, restrictions contained in future financing
instruments and other factors our board of directors deems
relevant.
22
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CAPITALIZATION
The following table sets forth our capitalization as of
December 31, 2004:
•
on an actual basis;
•
on a pro forma basis to give effect to the automatic conversion
    of all of our outstanding convertible preferred stock into
    51,515,582 shares of our common stock immediately prior to
    the closing of this offering; and
•
on a pro forma as adjusted basis to give further effect to the
    sale of a total
    of                      shares
    of common stock in this offering at an assumed initial public
    offering price of
    $          per
    share, which is the midpoint of the range set forth on the cover
    of this prospectus, after deducting underwriting discounts and
    commissions and estimated offering expenses payable by us.
This table should be read in conjunction with
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial
statements and the related notes and schedule thereto included
elsewhere in this prospectus.
As of December 31, 2004
Pro Forma
Actual
Pro Forma
As Adjusted
Long-term capitalized lease obligations, less current portion
$
17,193
$
17,193
Convertible Preferred Stock
39,924,995
—
Stockholders' (deficit) equity:
Common Stock, $.001 par value, 75,000,000 shares
    authorized, 10,000,000 shares issued and outstanding
    actual; 61,515,582 shares issued and outstanding pro forma;
    and           shares
    issued and outstanding, pro forma as adjusted
10,000
61,516
Additional paid-in capital
9,953,323
49,826,802
Deferred stock-based compensation
(1,532,766
)
(1,532,766
)
Accumulated deficit
(38,317,116
)
(38,317,116
)
Total stockholders' (deficit) equity
(29,886,559
)
10,038,436
Total capitalization
$
10,055,629
$
10,055,629
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DILUTION
If you invest in our common stock your interest will be diluted
immediately to the extent of the difference between the initial
public offering price per share and the pro forma net tangible
book value per share after this offering.
Our historical net tangible book value at December 31,
2004, before adjustment for this offering, was approximately
$(29.9) million, or approximately $(2.99) per share.
Net tangible book value per share represents the amount of total
tangible assets less total liabilities, divided by the number of
shares of common stock outstanding. Pro forma net tangible book
value as of December 31, 2004 was approximately
$10.0 million or $0.16 per share of common stock. Pro
forma net tangible book value gives effect to the conversion of
all of our outstanding convertible preferred stock into
51,515,582 shares of our common stock, which will occur
automatically immediately prior to the closing of this offering
and to the reverse stock split. After giving effect to the sale
of              shares
of common stock in this offering, at an assumed initial public
offering price of
$           per
share, which is the midpoint of the range set forth on the cover
of this prospectus, and after deducting the estimated offering
expenses, our pro forma net tangible book value at
December 31, 2004 would have been
$          or
$           per
share. This represents an increase in net tangible book value of
$           per
share to our existing stockholders and an immediate dilution
(i.e., the difference between the public offering price per
share and the net tangible book value per share adjusted for
this offering) at December 31, 2004 of
$           per
share to purchasers of the common stock offered hereby. The
following table illustrates this per share dilution:
Assumed initial public offering price per share
Historical net tangible book value per share as of
    December 31, 2004
$
(2.99
)
Increase in net tangible book value per share due to reverse
    stock split
Increase in net tangible book value per share due to the
    conversion of all shares of preferred stock
Pro forma net tangible book value per share before the offering
$
0.16
Increase in net tangible book value per share attributable to
    this offering
Pro forma net tangible book value per share after this offering
Dilution per share to new investors
$
Assuming the underwriters' over-allotment option is
exercised in full, the net tangible book value as of
December 31, 2004 would have
been             ,
or             per
share, the immediate increase in net tangible book value of
shares owned by existing stockholders would have been
$           per
share, and the immediate dilution to purchasers of common stock
in this offering would have been
$           per
share.
The following table summarizes as of December 31, 2004,
after giving effect to this offering and the pro forma
adjustments described above, the number of shares of common
stock purchased from us, the total consideration paid to us for
those shares and the average price per share paid by the
existing stockholders and by the new investors.
Shares Purchased
Total Consideration
Average Price
Number
Percent
Amount
Percent
per Share
Existing stockholders
50,668,966
%
$
39,872,559
%
$
0.79
New investors
%
%
Total
100.0
%
$
100.0
%
If the underwriters exercise their over-allotment option in
full, the following will occur:
•
the pro forma as adjusted percentage of shares of our common
    stock held by existing stockholders will decrease to
    approximately      % of the total
    number of pro forma as adjusted shares of our common stock
    outstanding after this offering; and
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Table of Contents
•
the pro forma as adjusted number of shares of our common stock
    held by new public investors will increase
    to                     ,
    or approximately      % of the total
    pro forma as adjusted number of shares of our common stock
    outstanding after this offering.
The tables and calculations above are based on shares
outstanding as of December 31, 2004 and exclude:
•
6,716,550 shares of our common stock issuable upon exercise
    of options outstanding as of December 31, 2004, at a
    weighted average exercise price of $0.64 per share, of
    which options to purchase 2,004,888 shares were exercisable
    as of that date; and
•
1,133,450 shares of our common stock available for future
    grant under the Valera Pharmaceuticals, Inc. Equity Incentive
    Plan as of December 31, 2004.
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Table of Contents
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth our selected historical financial
data as of December 31, 2003 and 2004 and for the years
ended December 31, 2002, 2003 and 2004, which have been
derived from our audited financial statements, included
elsewhere in this prospectus. The selected historical financial
data as of December 31, 2000, 2001 and 2002 and for the
period from May 30, 2000 to December 31, 2000 and the
year ended December 31, 2001 have been derived from our
audited financial statements, which are not included in this
prospectus. We have also presented financial data while we were
a division of GP Strategies Corporation for the period of
January 1, 2000 through May  29, 2000. It is
important that you read this information together with
"Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Risk
Factors" and our financial statements and related notes and
schedule to these financial statements beginning on page F-1 of
this prospectus. The historical results presented below are not
necessarily indicative of the results to be expected in any
future period.
For the
Predecessor
Period
Five Months
May 30,
Ended
2000 to
Year Ended December 31,
May 29,
December 31,
2000
2000
2001
2002
2003
2004
(Restated)
(1)
Net product sales
$
120,282
$
47,073
$
8,521
$
15,006
$
7,353
$
5,511,286
Licensing revenue
43,183
39,398
—
—
134,636
Total net revenue
163,465
86,471
8,521
15,006
7,353
5,645,922
Operating costs and expenses:
Cost of product sales
—
—
—
—
—
608,150
Research and development
824,517
1,147,741
2,616,136
4,319,709
5,229,529
6,375,819
Selling and marketing
—
—
—
269,633
509,514
5,025,038
General and administrative
1,507,003
609,688
1,521,892
1,324,378
1,838,101
5,897,435
Total operating expenses
2,331,520
1,757,429
4,138,028
5,913,720
7,577,144
17,906,442
Loss from operations
(2,168,055
)
(1,670,958
)
(4,129,507
)
(5,898,714
)
(7,569,791
)
(12,260,520
)
Interest income (expense), net
(2,747
)
(23,750
)
(30,398
)
15,919
13,134
(6,152
)
Loss before income taxes
(2,170,802
)
(1,694,708
)
(4,159,905
)
(5,882,795
)
(7,556,657
)
(12,266,672
)
Benefit for income taxes
—
—
—
—
—
(243,618
)
Net loss
(2,170,802
)
(1,694,708
)
(4,159,905
)
(5,882,795
)
(7,556,657
)
(12,023,054
)
Deemed
    dividend
(1)
—
—
—
—
(1,139,535
)
(5,860,465
)
Net loss attributable to common stockholders
$
(2,170,802
)
$
(1,694,708
)
$
(4,159,905
)
$
(5,882,795
)
$
(8,696,192
)
$
(17,883,519
)
Basic and diluted net loss attributable to common stockholders
    per share
$
(0.72
)
$
(0.56
)
$
(1.34
)
$
(0.59
)
$
(0.87
)
$
(1.79
)
Weighted average shares outstanding — basic and diluted
3,000,000
3,000,000
3,095,890
10,000,000
10,000,000
10,000,000
Unaudited pro forma basic and diluted net loss per
    share
(2)
$
(0.40
)
Unaudited pro forma weighted average shares outstanding basic
    and diluted
44,206,980
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As of December 31,
2000
2001
2002
2003
2004
(Restated)
(1)
Balance Sheet Data:
Cash and cash equivalents
$
—
$
6,620,869
$
640,577
$
5,241,246
$
5,052,643
Working capital
(92,874
)
5,657,823
(403,548
)
4,585,488
8,306,324
Total assets
586,251
7,172,082
1,296,188
6,664,550
13,323,193
Long-term liabilities
200,711
123,887
66,753
32,709
17,193
Convertible preferred stock
—
6,603,856
6,603,856
20,469,446
39,924,995
Accumulated deficit
(1,694,708
)
(5,854,610
)
(11,737,405
)
(20,433,597
)
(38,317,116
)
Total stockholders' (deficit) equity
$
186,081
$
(582,051
)
$
(6,464,846
)
$
(15,158,330
)
$
(29,886,559
)
(1)
We have determined that in connection with the issuance of our
    series B convertible preferred stock, certain anti-dilution
    provisions in our series A convertible preferred stock were
    activated. Because the shares of series B convertible
    preferred stock were sold at a price below the price that the
    shares of series A convertible preferred stock were sold,
    the conversion price and conversion ratio of the series A
    convertible preferred stock were adjusted in accordance with the
    original terms of that issuance when each tranche of
    series B convertible preferred stock was issued. These
    adjustments to the conversion price and the resulting conversion
    ratio resulted in deemed dividends being afforded to the holders
    of the series A convertible preferred stock. The total
    deemed dividend was not originally recorded in our 2003
    financial statements, but such statements have been restated to
    reflect this deemed dividend.
(2)
The pro forma net loss per share information is computed using
    the weighted average number of common shares outstanding, after
    giving pro forma effect to the automatic conversion of all
    outstanding shares of our convertible preferred stock into
    shares of common stock effective upon the completion of this
    offering, as if the conversion had occurred at the date of the
    original issuance.
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with our financial statements and the related notes
and schedule thereto appearing elsewhere in this prospectus.
This discussion and analysis may contain forward-looking
statements based upon current expectations that involve risks
and uncertainties. Our actual results may differ materially as a
result of various factors, including those set forth under
"Risk Factors" or elsewhere in this prospectus.
Overview
We are a fully-integrated specialty pharmaceutical company
concentrating on the development and commercialization of
products for the treatment of urological and endocrine
conditions, diseases and disorders. Our first product, Vantas,
was approved by the FDA in October 2004. Vantas is a 12-month
implant that delivers histrelin, a luteinizing hormone-releasing
hormone agonist, or LHRH agonist, for the palliative treatment
of advanced prostate cancer. We began selling Vantas in November
2004 utilizing our sales force that is currently calling on the
urologists in the U.S. that account for the majority of LHRH
agonist product sales.
Total U.S. sales of LHRH agonist products for the palliative
treatment of prostate cancer were approximately
$974 million in 2004 based on IMS Health Incorporated data,
with the leading products being the three- and four-month
injection formulations. We believe that Vantas has a competitive
advantage over these products because it delivers an even,
predetermined dose of LHRH agonist over a 12-month period, and
is the only product indicated for the palliative treatment of
advanced prostate cancer that delivers histrelin, the most
potent LHRH agonist available.
In addition to Vantas, a hydrogel implant based on our patented
Hydron Technology, we are developing a pipeline of proprietary
product candidates for indications that include central
precocious puberty, acromegaly, opioid addiction and
interstitial cystitis. Several of our product candidates also
utilize our Hydron Technology delivery system. We intend to
leverage our existing specialized sales force to market certain
of our product candidates, if approved, since the indications of
these product candidates are treated by many of the same
physicians we are calling on for Vantas.
Basis of Presentation
Product Sales and Costs
We generate revenues from sales of Vantas, our lead product. We
began commercial sales of Vantas in November 2004. Currently,
all sales are in the U.S. We distribute Vantas directly to
physicians, or through International Urology Network, or IUN, a
group purchasing organization, or GPO, and a subsidiary of
AmerisourceBergen Corporation. Approximately 10% of our sales
went through IUN in 2004. Our business may be affected by
physician utilization, pricing pressure and Medicare or third
party reimbursement, as well as other factors which may cause
variances in our revenue. We describe the factors affecting
reimbursement in more detail in the section entitled
"Business — Reimbursement" in this
prospectus.
In prior years, we received all of our revenue from the sale of
certain polymer products. We discontinued manufacturing these
polymers in 1996, as they were no longer profitable, so that we
could concentrate all of our efforts on developing
pharmaceutical products.
Our cost of product sales are all related to the production of
Vantas and represent the cost of materials, overhead associated
with the manufacture of Vantas, direct labor, delivery charges,
lab services and royalties. We expect our margins to improve as
the sales of Vantas increase, and other products are
commercialized. Prior to October 2004, we expensed all of our
manufacturing costs as research and development. Aggregate
royalty costs were $307,258 or 5% of net revenue for the year
ending December 31, 2004. No royalties were due in prior
years. For a more complete description of our royalty
arrangements, see "Business — Material
Agreements."
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Table of Contents
Research and Development Expenses
Our research and development expenses consist of costs incurred
for company-sponsored and collaborative research and development
activities. These expenses consist primarily of direct and
research-related allocated overhead expenses such as facilities
costs, salaries and benefits and material supply costs.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of sales and
marketing personnel compensation, sales force incentive
compensation, travel, tradeshows, promotional materials and
programs, advertising and healthcare provider education
materials and events.
General and Administrative Expenses
Our general and administrative expenses consist primarily of
personnel expenses for accounting, human resources, outside
consulting, information technology and corporate administration
functions. Other costs include administrative facility costs and
professional fees for legal and accounting services.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based on our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the U.S. The preparation
of these financial statements requires us to make judgments,
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements as well
as the reported revenue and expenses during the reporting
periods. We continually evaluate our judgments, estimates and
assumptions. We base our estimates on the terms of underlying
agreements, the expected course of development, historical
experience and other factors that we believe are reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
The list below is not intended to be a comprehensive list of all
of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated
by generally accepted accounting principles, or GAAP. There are
also areas in which our management's judgment in selecting
any available alternative would not produce a materially
different result. Our audited financial statements and the notes
thereto included elsewhere in the prospectus contain accounting
policies and other disclosures required by GAAP.
Revenue Recognition
Our revenue recognition policies are in accordance with
Securities and Exchange Commission Staff Accounting Bulletin
No. 104, or SAB No. 104,
Revenue Recognition
in Financial Statements
, which provides guidance on revenue
recognition in financial statements, and is based on the
interpretations and practices developed by the Securities and
Exchange Commission. SAB 104 requires that four basic
criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered;
(3) the seller's price to the buyer is fixed and
determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on our
management's judgments regarding the fixed nature of the
fee charged for products delivered and the collectibility of
those fees. Should changes in conditions cause our management to
determine that these criteria are not met for certain future
transactions, revenue recognition for those transactions will be
delayed and our revenues could be adversely affected.
Pre-clinical Study and Clinical Trial Expenses
Research and development expenditures are charged to operations
as incurred. Our expenses related to clinical trials are based
on actual and estimates of the services received and efforts
expended pursuant to
29
Table of Contents
contracts with multiple research institutions and clinical
research organizations that conduct and manage clinical trials
on our behalf. The financial terms of these agreements are
subject to negotiation and vary from contract to contract and
may result in uneven payment flows. Generally, these agreements
set forth the scope of work to be performed at a fixed fee or
unit price. Payments under the contracts depend on factors such
as the successful enrollment of patients or the completion of
clinical trial milestones. Expenses related to clinical trials
generally are accrued based on contracted amounts applied to the
level of patient enrollment and activity according to the
protocol. If timelines or contracts are modified based upon
changes in the clinical trial protocol or scope of work to be
performed, we modify our estimates accordingly on a prospective
basis.
Stock-based Compensation
In December 2002, Statement of Financial Accounting
Standards, or SFAS No. 148,
Accounting for Stock-Based
Compensation — Transition and Disclosure —
an Amendment of FASB Statement No. 123
was issued.
SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation from the
intrinsic value-based method of accounting prescribed by
Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees
, or APB 25.
In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123,
Accounting for Stock
Based Compensation
. We adopted the disclosure requirements
of SFAS No. 148 effective December 31, 2002. As
allowed by SFAS No. 123, we have elected to continue
to apply the intrinsic value-based method of accounting
prescribed in APB No. 25 and, accordingly, do not
recognize compensation expense for stock option grants made at
an exercise price equal to or in excess of the estimated fair
value of the stock at the date of grant. Deferred compensation
is recognized and amortized on an accelerated basis in
accordance with Financial Accounting Standards Board
Interpretation No. 28,
Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans
, over
the vesting period of the related options.
We account for options issued to non-employees under
SFAS No. 123 and Emerging Issues Task Force, or EITF,
Issue 96-18,
Accounting for Equity Investments that are
Issued to Other than Employees for Acquiring or in Conjunction
with Selling Goods or Services
. As such, the value of such
options is periodically remeasured and income or expense is
recognized during their vesting terms. The amount of stock-based
compensation expense to be recorded in future periods may
decrease if unvested options, for which deferred stock
compensation has been recorded, are subsequently canceled.
Valuation of Inventory
We value inventory at the lower of cost, or market, on a first
in first out, or FIFO, basis. We calculate an inventory reserve
for estimated obsolescence or excess inventory based upon
historical demand and assumptions about future demand for our
products and market conditions. If our current assumptions about
future demand change and if actual market conditions are less
favorable than anticipated, additional inventory reserves may be
required which would negatively impact our gross margin.
Cost of Product Sales
Royalty costs are included as a cost of product sales. The
royalty costs are determined by applying the royalty rate in
each license agreement to the specific product offering included
in that particular agreement, including any deductions to sales
or royalty cost allowed under the royalty terms. The
determination of royalty costs can be affected by various
factors including changes in the terms of the underlying
agreements, changes in our interpretation of the application of
the terms of the underlying agreement, changes in the level of
revenue, changes in the level of allowed deductions and
additional product licenses.
We expect our margins to improve as the sales of Vantas
increase, and other products are commercialized. If our current
assumptions about additional sales and product approval change,
or if actual market conditions are less favorable than
anticipated, additional inventory reserves may be required which
would negatively impact our gross margin.
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Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts related to the
estimated losses that may result from the inability of our
customers to make required payments. This allowance is
determined based upon historical experience, industry
experience, investigative techniques, and any specific customer
collection issues that have been identified. We only recently
began selling our first product, Vantas, in November 2004.
Accordingly, we do not have significant history to draw upon.
Deterioration in our ability to collect our receivables could
result in an increase in our allowance for doubtful accounts and
increase our general and administrative expenses.
Income Taxes
We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. In the event we were to determine that we would be
able to realize our deferred tax assets in the future in excess
of their net recorded amounts, an adjustment to the deferred tax
assets would increase our income in the period such
determination was made. For the years ended December 31,
2002, 2003, and 2004, we had net deferred tax assets prior to
valuation allowance of $2.5 million, $5.7 million, and
$10.6 million respectively, which were fully offset by a
valuation allowance.
Results of Operations
Comparison of Years Ended December 31, 2003 and
    2004
Net Product Sales.
After receiving FDA approval in
October 2004 of our lead product Vantas, we commenced
commercial sales in November 2004. Net sales for the year
ending December 31, 2004 were $5,511,286. We sold
approximately 2,200 units of Vantas at an average net
selling price of approximately $2,500. Net sales for the year
ending December 31, 2003 were $7,353 and were completely
derived from the sale of certain polymer products.
Licensing Revenue.
During the year ended
December 31, 2003 through September 2004 we did not
recognize any licensing revenue, as we were attempting to
eliminate the cross licensing arrangement we have with Hydron
Technologies. During this time, no licensing fees were paid to
us. In 2004, back fees of $134,636 were paid, as an agreement
with Hydron Technologies to terminate the cross licensing
agreement could not be reached. We estimate that we will receive
royalties of approximately $35,000 annually in the future under
this arrangement.
Cost of Product Sales.
Our cost of product sales for the
year ending December 31, 2004 was $608,150 resulting in a
gross margin of 89%. Such gross margin includes the sale of
1,020 units of products manufactured prior to FDA approval. In
the future, we expect our gross margin to be lower as we sell
through product at fully burdened manufacturing cost. The cost
of product sales calculation includes an accrued royalty expense
of $307,258 for the year ended December 31, 2004. Through
October 2004, all manufacturing costs were included in
research and developments costs. There were no sales for the
year ended December 31, 2003 that were subject to a
royalty. For the year ended December 31, 2003, there was
not a cost of product sales, as the value of the polymer
products were written off in prior years.
Research and Development Expenses.
Research and
development expense for the years ended December 31, 2003
and 2004 were $5,229,529 and $6,375,819, respectively. The 21.9%
increase from 2003 to 2004 was primarily attributable to
manufacturing costs of Vantas through October 2004, and a
stock-based compensation charge of $297,314.
Expenses related to clinical trials pursuant to contracts with
research institutions and clinical research organizations
represented 55% of our total research and development expenses
in 2003 and 24% of our research and development expenses in 2004.
Selling and Marketing Expenses.
Selling and marketing
expense for the years ending December 31, 2003 and 2004
were $509,514 and $5,025,038 respectively. The increase in 2004
over 2003 was primarily the result of expenses related to the
launch of our lead product Vantas in November 2004. We hired a
national
31
Table of Contents
sales force consisting of approximately thirty experienced
individuals. In addition, marketing expense was increased due to
the promotion of Vantas and a stock-based compensation charge of
$579,884.
General and Administrative Expenses.
General and
administrative expenses were $1,838,101 for 2003, and $5,897,435
for 2004. The increase from 2003 to 2004 was primarily
attributable to a stock-based compensation charge of $2,226,988,
the hiring of additional personnel, increased legal fees
associated with pursuing and maintaining patent protection for
our product candidates and other corporate matters, accounting
fees relative to our expanding business, and other professional
services required to support the hiring of personnel.
Stock-Based Compensation.
We recorded non-cash
compensation charges of $2,708 and $51,104 in 2003 and 2004,
respectively, relative to non-employee stock options. The
exercise price of all options issued prior to 2003 was amended
to $0.50 in October 2003, the fair market value. In
connection with the grant of stock options to employees, we
recorded stock-based compensation of $3,031,119 in 2004 which is
related to a repricing of grants made in 2002. In accordance
with FASB Interpretation, or FIN, No. 44, the re-priced
options will be accounted for as variable from the date of the
modification to the date the accruals are exercised, forfeited,
or expire. The 2004 stock-based compensation charge also
includes stock-based compensation of $73,067 for stock options
granted in 2004 at prices below the deemed fair value on the
option grant dates. The stock-based compensation is included in
the following line items in the statement of operations:
General and administration
$
2,226,988
Sales and marketing
579,884
Research and development
297,314
Net Interest Income (Expense).
Net interest income was
$13,134 in 2003 and $(6,152) in 2004. The variances are
primarily attributable to fluctuations in our average cash
balances and lower interest rates.
Income Taxes.
We have incurred net operating losses since
inception and, consequently, have not recorded any federal or
state income tax benefit. In 2004, the New Jersey Economic
Development Authority approved our application to sell New
Jersey State income tax benefits under the New Jersey Technology
Tax Transfer Program. During the fourth quarter of 2004, we
recognized $243,618 from the sale of State of New Jersey income
tax benefits. The program requires that we maintain certain
employment levels in New Jersey and that the proceeds from the
sale of the tax benefits be spent in New Jersey. Our deferred
tax assets primarily consist of net operating loss carryforwards
and research and development tax credits. We have recorded a
valuation allowance for the full amount of our deferred tax
asset, as the realization of the deferred tax asset is
uncertain. As of December 31, 2004, we had federal and
state tax net operating loss carryforwards of approximately
$20.0 million and $17.0 million, respectively. These
federal and state tax loss carryforwards will begin expiring in
2022 for federal purposes and 2011 for state purposes. Annual
limitations may result in the expiration of net operating loss
and credit carryforwards before they are used. Under the
provisions of the Internal Revenue Code, substantial changes in
our ownership may limit the amount of net operating loss
carryforwards that could be utilized annually in the future to
offset taxable income.
Comparison of Years Ended December 31, 2002 and
    2003
Net Product Sales.
Product sales for the years ending
December 31, 2002 and 2003 were derived from the sale of
certain polymer products. There was no cost of product sales as
the value of the polymer products were written off in prior
years. Net product sales for 2002 and 2003 were $15,006 and
$7,353 respectively.
Licensing Revenue.
For the years ended December 31,
2002 and 2003 no licensing fees were paid to us as we were
attempting to eliminate the cross licensing arrangement we have
with Hydron Technologies.
Research and Development Expenses.
Research and
development expense for the years ended December 31, 2002
and 2003 were $4,319,709 and $5,229,529, respectively. The 21.1%
increase from 2002 to 2003 was primarily attributable to the
hiring of additional consultants and increased clinical trial
activities associated with the completion of our Phase III
clinical trials of our lead product Vantas.
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Expenses related to clinical trials pursuant to contracts with
research institutions and clinical research organizations
represented 58% of our total research and development expenses
in 2002 and 55% of our total research and development expenses
in 2003.
Selling and Marketing Expenses.
Selling and marketing
expense for the years ending December 31, 2002 and 2003
were $269,633 and $509,514 respectively. The 89.0% increase in
2003 over 2002 was predominantly due to additional market
research costs and related materials, attending urological
conferences and business development.
General and Administrative Expenses.
General and
administrative expenses were $1,324,378 for 2002 and $1,838,101
for 2003. The 38.8% increase from 2002 to 2003 was largely due
to additional legal and consulting fees required to complete the
new drug application filed in December 2003 for Vantas.
Stock-Based Compensation.
We recorded non-cash
compensation charges of $2,708 in 2003 relative to non-employee
stock options. There were no options granted to non-employees in
2002. The exercise price of all options issued prior to 2003 was
amended in October 2003 to $0.50, the fair market value at that
time.
Net Interest Income (Expense).
Net interest income was
$15,919 in 2002 and $13,134 in 2003. The variance is primarily
attributable to fluctuations in our average cash balances and
lower interest rates.
Liquidity and Capital Resources
We have financed our operations primarily from private
placements of our equity securities, and as of December 31,
2004, we had received total consideration of approximately
$33 million from the issuance of our series A, B and C
convertible preferred stock.
As of December 31, 2004, cash and cash equivalents were
$5,052,643, compared to $5,241,246 as of December 31, 2003.
Net cash used in operating activities was $12,141,622 for 2004.
The primary use of cash was to fund net losses for the period,
adjusted for non-cash expenses including $257,495 for
depreciation and amortization and $3,155,290 in stock-based
compensation expense. In addition, working capital increased by
$3,780,836 as a result of the commercialization of Vantas and
the related increase in accounts receivable and inventory.
Net cash used in investing activities was $1,610,378 for 2004.
These activities consisted of purchases of manufacturing
equipment and leasehold improvements to our facilities.
Net cash provided by financing activities was $13,563,397 in
2004. This activity consisted primarily of the private sales of
convertible preferred stock, which was offset in part by ongoing
payment of capitalized lease obligations. The principal balance
of our capitalized lease obligations was $35,066 at
December 31, 2004.
In November 2004, we launched Vantas, and net sales for the
period ended December 31, 2004 were $5,511,286. We
anticipate that cash flows from sales of Vantas will reduce our
need for additional financing. We expect our cash requirements
to continue to increase in the foreseeable future as we continue
to sponsor additional clinical trials, seek regulatory approvals
of, and develop, manufacture and market our current product
candidates. As we continue to expand our commercial organization
to include the development of our field sales force, expand our
research and development efforts and pursue additional
opportunities, we anticipate significant cash requirements for
hiring of personnel, capital expenditures and investment in
additional internal systems and infrastructure.
The amount and timing of cash requirements will depend on market
acceptance of our lead product, Vantas, and regulatory as well
as market acceptance of our product candidates, if any, and the
resources we devote to researching, developing, formulating,
manufacturing, commercializing and supporting our product
candidates, and our ability to enter into third-party
collaborations.
We believe that our current cash, cash equivalents and
short-term investments, together with the proceeds from this
offering, will be sufficient to fund our operations for at least
the next 12 months. Until we can generate significant cash
from our operations, we expect to continue to fund our
operations with existing
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Table of Contents
cash resources that were primarily generated from the proceeds
of offerings of our equity securities. In addition, we may
receive revenue from our sublicense agreements with Paladin Labs
Inc., Key Oncologics (Pty) Ltd. and BioPro Pharmaceutical, Inc.
We may finance future cash needs through strategic collaboration
agreements, the sale of other equity securities or debt
financing. However, we may not be successful in obtaining
collaboration agreements or in receiving milestone or royalty
payments under those agreements. In addition, we cannot be sure
that in the future our existing cash resources will be adequate
or that additional financing will be available when needed or
that, if available, financing will be obtained on terms
favorable to us or our stockholders. Insufficient funds may
require us to delay, scale back or eliminate some or all of our
research or development programs or delay the launch of our
product candidates.
Contractual Obligations and Commitments
The following table summarizes our long-term contractual
obligations as of December 31, 2004.
Payments Due in
Contractual Obligations
Total
2005
2006
2007
2008
2009
After 2009
Operating
    leases
(1)
$7,757,985
$826,753
$844,877
$839,497
$839,497
$839,497
$3,567,864
Capital lease obligations
41,039
22,316
18,723
—
—
—
—
Accrued
    royalties
(2)
307,258
307,258
—
—
—
—
—
$8,106,282
$1,156,327
$863,600
$839,497
$839,497
$839,497
$3,567,864
(1)
On March 8, 2005, we entered into an additional building
    lease of approximately 21,300 square feet for our office
    and research and development needs. The lease will be
    co-terminus with our existing building lease. From inception
    through June 30, 2005, the base rent will be
    $43,044 per month. From July 1, 2005 until
    June 30, 2010, the annual base rent will be $537,808.
    Commencing July 1, 2010, the annual base rent will be
    $707,999.
(2)
Royalty payments have only been determined for 2005 based upon
    2004 sales. Future royalties have not been estimated as they are
    based on future sales levels.
Off-balance Sheet Arrangements
As of December 31, 2004 we did not have any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
Quantitative and Qualitative Disclosures About Market Risk
To date, all of our sales have been denominated in
U.S. dollars, although we do conduct some clinical and
safety studies with vendors located outside the U.S. All of
these expenses are paid in U.S. dollars. If the exchange
rate undergoes a change of 10%, we do not believe that it would
have a material impact on our results of operations or cash
flows. Accordingly, we believe that there is no material
exposure to risk from changes in foreign currency exchange rates.
We hold no derivative financial instruments and do not currently
engage in hedging activities.
Our exposure to interest rate risk at December 31, 2004 is
related to the investment of our excess cash into highly liquid
financial investments with original maturities of three months
or less. We invest in money market funds in accordance with our
investment policy. The primary objectives of our investment
policy are to preserve principal, maintain proper liquidity to
meet operating needs and maximize yields. Our investment
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policy specifies credit quality standards for our investments.
Due to the short term nature of our investments, we have
assessed that there is no material exposure to interest rate
risk arising from them.
Recent Accounting Pronouncements
On December 16, 2004, FASB issued SFAS No. 123
(revised 2004),
Share-Based Payment
, which is a revision
of SFAS No. 123,
Accounting for Stock-Based
Compensation.
SFAS 123(R) supersedes APB 25 and
amends SFAS No. 95
Statement of Cash Flows
.
Generally, the approach in SFAS 123(R) is similar to the
approach described in SFAS 123. However, SFAS 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no
longer an alternative.
SFAS 123(R) must be adopted no later than July 1,
2005. Early adoption will be permitted in periods in which
financial statements have not been issued. We expect to adopt
SFAS 123(R) on July 1, 2005.
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BUSINESS
We are a fully-integrated specialty pharmaceutical company
concentrating on the development and commercialization of
products for the treatment of urological and endocrine
conditions, diseases and disorders. Our first product, Vantas,
was approved by the FDA in October 2004. Vantas is a 12-month
implant that delivers histrelin, a luteinizing hormone-releasing
hormone agonist, or LHRH agonist, for the palliative treatment
of advanced prostate cancer. We began marketing Vantas in
November 2004 utilizing our sales force that is currently
calling on the urologists in the U.S. that account for the
majority of LHRH agonist product sales. In addition to Vantas,
we are developing a pipeline of proprietary product candidates
for indications that include central precocious puberty,
acromegaly, opioid addiction and interstitial cystitis.
Total U.S. sales of LHRH agonist products for the
palliative treatment of prostate cancer were approximately
$974 million in 2004 based on IMS Health Incorporated data,
with the leading products being three- and four-month injection
formulations. We believe that Vantas has a competitive advantage
over these products because it delivers an even, controlled dose
of LHRH agonist over a 12-month period, and is the only product
indicated for the palliative treatment of advanced prostate
cancer that delivers histrelin, the most potent LHRH agonist
available.
Vantas is a hydrogel implant based on our patented Hydron
Technology. Hydron Technology is a drug delivery system that
allows us to control the amount and timing of the release of
drugs into the body for up to 12 months. Several of our
product candidates utilize Hydron Technology delivery system. We
intend to leverage our specialized sales force to market certain
of our product candidates, if approved, since the indications of
these product candidates are treated by many of the same
physicians we are calling on for Vantas.
Our Competitive Strengths
We believe that our key competitive strengths that distinguish
us from our competitors include:
•
Technology.
We believe that Hydron Technology offers
    significant advantages over existing drug delivery systems.
    Implants using Hydron Technology can be adapted to deliver many
    kinds of drugs over an extended period of time. In addition,
    these implants are soft and flexible, which enhances patient
    comfort. Further, because we own the manufacturing know-how to
    develop products utilizing Hydron Technology, we are able to
    control and maximize the potential commercial uses of this
    technology.
•
Development Capability.
As demonstrated by Vantas, we
    have the internal capability to efficiently develop a product
    and successfully take it through the regulatory process to
    market. We received FDA approval for Vantas within
    10 months of submitting our new drug application. In
    addition, over the past three years, we have advanced two other
    product candidates into late-stage clinical development. We
    expect to continue to utilize this capability to efficiently
    develop future products.
•
Manufacturing Ability.
We manufacture Vantas and our
    product candidates utilizing Hydron Technology using a patented
    process. In addition, we have developed proprietary equipment
    and scalable manufacturing methods to achieve cost-effective
    commercial production. Further, because we control the
    manufacture of Vantas and our product candidates, we can ensure
    high quality and fully realize manufacturing cost efficiencies.
•
Sales and Marketing.
We are currently calling on the
    urologists that account for the majority of LHRH agonist product
    sales in the U.S. By adjusting our current sales force structure
    slightly, we will be able to call on physicians in additional
    specialty areas, such as endocrinology. These therapeutic areas
    are attractive because a small, focused sales force can
    effectively target them. We also believe that the direct
    physician distribution channel of Vantas may present a barrier
    to the future entry of competition from generic products because
    generic drug companies do not typically have field sales forces.
    As part of our marketing strategy, we have entered into a
    strategic partnership with IUN, a group purchasing organization,
    for over 40% of all practicing urologists. Outside the U.S., we
    intend to
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partner with companies with a local presence and proven
    distribution channels in the urology market for distribution of
    Vantas.
Product Development
The following table summarizes certain information regarding
Vantas and our product candidates:
Therapeutic
Delivery
Product
Indication
Area
Method
Status
Next Anticipated Milestone
Vantas
Prostate Cancer
Urology
Implant
Commercial Sales
European Regulatory Filing in First Half of 2005
VP002 (Histrelin)
Central Precocious Puberty
Endocrinology
Implant
Phase III
New Drug Application Filing in First Half of 2006
VP003 (Octreotide)
Acromegaly
Endocrinology
Implant
Phase I/II
Phase IIb Clinical Trial in Second Half of 2005
VP004 (Naltrexone)
Addiction Disorders
Central Nervous System
Implant
Pre-clinical
Phase I/II Clinical Trial in First Half of 2006
VP005 (Anti- inflammatory)
Interstitial Cystitis
Urology
Bladder Instillation
Pre-clinical
Phase I/II Clinical Trial in First Half of 2006
Vantas
Vantas is an implant utilizing Hydron Technology to deliver
histrelin over a 12-month period for the palliative treatment of
advanced prostate cancer. The total number of patients with
advanced prostate cancer in the U.S. was 652,000 in 2004.
We estimate the patient population to be similar in Europe, and
we plan to file an application for regulatory approval in the
European Union in the first half of 2005. The current standard
of care for the palliative treatment of prostate cancer is LHRH
agonist therapy. An agonist is a chemical substance capable of
activating a receptor to induce a full or partial
pharmacological response. LHRH agonist therapies for advanced
prostate cancer are designed to suppress the production of
testosterone because testosterone promotes and accelerates the
growth of tumors associated with prostate cancer. Histrelin, a
powerful inhibitor of testosterone production, is the most
potent LHRH agonist available.
Total U.S. sales of LHRH agonist products for the
palliative treatment of prostate cancer were approximately
$974 million in 2004 based on IMS Health market data. The
most common dosage forms for the administration of LHRH agonists
involve three- and four-month injection formulations such as
Lupron and Eligard, which deliver leuprolide, and Zoladex, a
biodegradable rod, which delivers goserelin. Another product is
Viadur, a rigid metal implant that releases leuprolide over a
12-month period. We believe that Vantas is a more comfortable
and convenient alternative to competing products because it
eliminates the requirement of multiple physician visits and
repeated injections and is smaller, softer and more flexible
than other implants. In addition, in our Phase III clinical
trial for Vantas, 100% of the evaluable patients achieved
chemical castration at week four and testosterone suppression
was maintained throughout the 52-week study period for 99% of
the patients. Based on these data, we believe Vantas is a highly
effective product for the palliative treatment of advanced
prostate cancer.
Prostate cancer is the most common cancer for men and the second
leading cause of cancer death in men. According to the American
Cancer Society, every year approximately 200,000 men are
diagnosed with
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prostate cancer and 40,000 die from this disease. The National
Cancer Institute's SEER Program and the National Oncology
Database each project that this patient group will grow at an
annual rate of 2-3% per year through 2008 and beyond.
We are currently selling and marketing Vantas through our sales
force to the urologists that account for the majority of LHRH
agonist product sales in the U.S. Our product specialists
utilize various promotional materials when making clinical
presentations, including instructional videos on proper
implantation technique. In remote areas where our product
specialists cannot make personal visits, we conduct direct mail
programs and telemarketing campaigns to selected physicians. We
may also supply physicians, health plan administrators and
specialty pharmacies with a pharmaco-economic model to
demonstrate the cost effectiveness of Vantas compared to other
LHRH agonist products due to decreased utilization of staff time
for repeated injections and a single reimbursement claim per
year as opposed to three or four. Additionally, we support our
sales efforts by employing a wide range of marketing programs to
promote Vantas, including journal advertising, industry
publications, medical educational conferences and internet
initiatives.
VP002 (Histrelin)
VP002 is an implant utilizing Hydron Technology to deliver
histrelin over a 12-month period for the treatment of central
precocious puberty, or CPP. The prevalence of this condition is
estimated to be between one in 5,000 to 10,000 children. This
yields a potential population of up to 11,700 children with this
condition who are 14 or younger in the U.S. CPP is the
early onset of puberty in young children, resulting in the
development of secondary sexual characteristics and short
stature, if left untreated. The development of these secondary
sexual characteristics is due to an increase in the secretion of
sex hormones, the cause of which is unknown. The standard of
care of CPP involves the use of LHRH agonists to suppress the
secretion of sex hormones in order to delay the onset of puberty.
The only therapy currently marketed to treat CPP is Lupron
Depot-PED, which is manufactured and marketed by TAP
Pharmaceutical Products, Inc. According to IMS Health market
data, Lupron Depot-PED generated revenues in excess of
$71 million in the U.S. in 2004. CPP treatment using
Lupron Depot-PED consists of monthly intramuscular injections of
leuprolide to hormonally suppress these children. Our research
indicates that, in many cases, hormonal suppression may not be
achieved by a monthly injection schedule, and leuprolide needs
to be administered more frequently. VP002 delivers histrelin,
which has 10 times the relative potency of leuprolide, and which
has been previously approved for this condition as a daily
injection for children. VP002 is formulated to release a higher
daily dose of histrelin than Vantas because children with CPP
need higher doses of LHRH agonist to achieve hormonal
suppression. If approved, VP002 would provide hormonal
suppression over a 12-month period. We believe VP002 would have
a competitive advantage over existing products because it
eliminates the monthly injections given to these children and
offers increased convenience and reduced costs by eliminating
the need for monthly physician visits.
In a survey conducted by D2 Market Research at the 2004
Pediatric Academic Society conference, over 50% of the pediatric
endocrinologists who completed a self-administered questionnaire
indicated they would be likely to use a one-year implant like
VP002. There are approximately 700 pediatric endocrinologists in
the U.S., and most of them are located in the same major
metropolitan areas as the urologists we are calling on for
Vantas. We intend to market VP002, if approved, by leveraging
our existing sales force and hiring only a small number of
additional product specialists.
Results from our Phase II clinical trial of VP002 showed
that all patients were hormonally suppressed for the entire
12-month period. As demonstrated by blood tests, the primary
efficacy endpoints of our Phase II clinical trial were the
suppression of testosterone in boys and estradiol in girls.
Based on the successful outcome of our Phase II clinical
trials, we are currently conducting a single Phase III
clinical trial with 36 patients. Because the patient
population for CPP is small, clinical studies with smaller
sample sizes are permitted by the FDA. The endpoints of this
clinical trial, as agreed with the FDA, will be the suppression
of luteinizing hormone upon a gonadotropin releasing hormone
challenge. We completed enrollment of patients in our
Phase III clinical trial in March 2005 and plan on filing a
new drug application with the FDA in the first half of 2006.
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VP003 (Octreotide)
VP003 is an implant utilizing Hydron Technology to deliver
octreotide over a six-month period for the treatment of
acromegaly. We believe there are approximately 1,000 new
acromegalic patients per year in the U.S. and 16,000 total
patients. Acromegaly is a chronic hormonal disorder that occurs
when a pituitary tumor produces excess growth hormone, or GH. It
most commonly affects middle-aged adults, and if untreated,
causes enlargement of certain bones, cartilage, muscles, organs
and other tissue, leading to serious illness and potential
premature death.
Octreotide is a treatment used to substantially reduce GH levels
and insulin-like growth factor levels, or IGF-1 levels, in
patients with acromegaly. Octreotide is also approved to treat
the symptoms associated with metastatic carcinoid tumors and
vasoactive intestinal peptide secreting adenomas, which are
gastrointestinal tumors. Octreotide is currently being marketed
by Novartis as Sandostatin injections in several strengths in
both daily and monthly formulations.
Worldwide sales of Sandostatin generated revenues in excess of
$827 million in 2004 according to Scrip World
Pharmaceuticals News. We estimate the U.S. acromegalic
market, with an estimated 16,000 acromegalics, to be
approximately $160 million annually, consisting mostly of
monthly injections. We believe there is a market for a
longer-acting octreotide formulation such as VP003 in order to
reduce the number of physician visits for injections of
octreotide. In addition, since there are a limited number of
endocrinologists dispensing octreotide and patients are
dispersed throughout the country, we believe patient compliance
would also be significantly improved by longer-acting treatment
with VP003.
Research conducted by D2 Market Research shows that a
longer-acting octreotide product would be favorably received in
the endocrinology market. The endocrinologists interviewed by D2
cited the poor compliance of acromegalics who are required to
visit a doctor every month to get injections for a disease in
which patients rarely notice the changes being caused by the
condition. Another reason cited for poor compliance was the long
distances many patients have to travel for treatment because of
the limited number of physicians willing to administer the
monthly formulation of Sandostatin due to the complexity of the
technique involved.
There are about 4,400 endocrinologists practicing in the U.S.,
and most of them are located in the same metropolitan areas
where we are marketing Vantas to urologists. We intend to market
VP003 by leveraging our existing sales force and hiring only a
small number of additional product specialists. Furthermore, we
may already have a presence with endocrinologists to market
VP003, if approved, as a result of the potential marketing of
VP002, our histrelin implant to treat CPP.
In 2004, we initiated and completed a Phase I/ II
pharmacokinetic clinical trial with 11 acromegalic patients to
evaluate the release characteristics of VP003 and examine safety
and efficacy parameters. The endpoints of this clinical trial
were the reductions in GH and IGF-1 levels in the blood in these
patients. We plan to initiate a Phase IIb clinical trial to
evaluate the efficacy of VP003 as compared to the monthly
formulation of Sandostatin in the second half of 2005. The
endpoints of our Phase IIb clinical trial will be the
reductions in GH and IGF-1 levels in the blood in these
patients, which were the endpoints in the Phase III
clinical trial of Sandostatin.
VP004 (Naltrexone)
VP004 is an implant utilizing Hydron Technology to deliver
naltrexone for the treatment of opioid addiction over a
six-month period. The National Institute for Drug Addiction
estimates that there are approximately one million heroin
addicts in the U.S. of which only 25% seek treatment.
Naltrexone is an opiate antagonist currently approved as an oral
daily formulation in the U.S. for the treatment of opiate
dependence. Naltrexone competitively binds at the opiate
receptor sites in the brain, thereby blocking the euphoric
effects of opiates such as heroin.
Although naltrexone is effective, the addict population is
typically non-compliant. We believe that this creates an
attractive opportunity for VP004 because it provides controlled
release of naltrexone over a six-month period. There are 214
registered addiction medicine specialists practicing in the
U.S. Further, a
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significant number of primary care providers treat opioid
addicts. In addition to opioid addiction, naltrexone is also
currently approved in the U.S. for the treatment of
alcoholism.
VP004 is presently undergoing animal testing for evaluation of
safety and pharmacokinetics. Upon successful completion of these
tests, we intend to file an investigational new drug application
and initiate a pilot Phase I/ II clinical trial among an
opioid addict population in the first half of 2006. While we are
currently developing VP004 for the treatment of opioid
addiction, we may decide in the future to pursue an indication
for the treatment of alcoholism as well. We plan to license the
rights to use VP004 to an addiction specialty firm prior to
conducting Phase III clinical trials.
VP005
(Anti-inflammatory)
VP005 is a proprietary polymer solution instillation for the
treatment of symptoms associated with interstitial cystitis, a
chronic inflammatory condition of the bladder. Interstitial
cystitis, or IC, affects approximately one million people in the
U.S. IC is characterized by frequent urination and pain
above the pubic region. The cause of IC is unknown but is
believed to involve inflammation of the lining of the bladder.
We believe that IC is a disease that has been poorly served by
the pharmaceutical industry. Elmiron is the only product
currently approved for the relief of bladder pain or discomfort
associated with IC. Elmiron is manufactured and marketed by
Ortho-McNeil Pharmaceutical, Inc. and is an oral formulation
containing 100 milligrams of pentosan polysulfate sodium, a
semi-synthetic molecule that is taken three times a day.
According to IMS Health market data, Elmiron generated revenues
in excess of $100 million in the U.S. in 2004. Our
discussions with urologists indicate that Elmiron is only
occasionally effective and that many patients require
instillation therapy, a more invasive form of treatment
utilizing a catheter to fill up the bladder with various
solutions. Instillation therapy has been shown to abate the
symptoms of IC in some patients. VP005 is an instillation
therapy that forms a temporary coating on the internal lining of
the bladder and facilitates the slow, controlled release of the
drug in VP005 into the bladder. We intend to license the drug
delivery technology used in VP005 and intend to apply for patent
protection for this application of that technology.
VP005 has been successful in animal models in treating what we
believe to be the major contributing factor in producing the
painful symptoms of IC. We have drafted a Phase I/II
protocol to evaluate VP005 in humans. We are planning a meeting
in March 2005 with a panel of IC experts from the U.S. to help
refine the protocol and conduct clinical trials. We expect to
file an investigational new drug application with the FDA and
initiate a Phase I/II trial in the first half of 2006.
Our Drug Delivery System
Human implantable drug delivery is a relatively new therapeutic
drug delivery approach in which drugs are administered directly
into the circulatory system through a biocompatible, non-toxic
device. We believe this type of drug delivery is suitable for
certain drugs that are not amenable to oral delivery, such as
therapeutic peptides that are destroyed in the gastrointestinal
tract, or GI tract, or drugs poorly absorbed by the GI tract or
destroyed in the liver. In such cases, increasing the dosage of
these drugs to increase absorption may result in harmful side
effects. As a result, we believe that implantable drug delivery
systems may provide safer and more effective administration of
therapy by delivering the drug directly to the bloodstream at
even, predetermined rates.
Hydron Technology, our proprietary drug delivery technology, is
the basis of our patented hydrogel implant, which is inserted
under a patient's skin. This technology, which evolved from
similar technology used in soft contact lenses, is flexible and
can be adapted to deliver many types of drugs. The implant is
designed to allow release of drugs continuously, at even,
controlled rates for up to a 12-month period. We believe that
such predictable release over a period of 12 months has not
been achieved by most other drug delivery systems, including
sustained release injections, bioerodible implants and
transdermal devices. In addition, implants utilizing Hydron
Technology are smaller, softer and more flexible than other
implants and eliminate the requirement of multiple physician
visits and repeated injections. Utilizing Hydron Technology, we
are able to manufacture implants to the exact chemical and
physical specifications required by the particular drugs to
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be released. By modifying the geometric characteristics (wall
thickness, diameter and length) and the polymer make-up of the
implants, we can vary the release rates of a broad spectrum of
drugs according to the therapeutic levels required. Once filled
with an active ingredient, sealed and sterilized, the implant is
inserted into a patient in a minor outpatient procedure
generally performed in a physician's office. If necessary,
the physician can easily remove the implant from the body in a
similar procedure. We believe that advantages of our Hydron
Technology include:
•
Increased Patient Compliance.
Hydron Technology releases
    drugs for up to a 12-month period. As a result, the need for
    multiple physician visits and the inconvenience associated with
    frequent injections are eliminated, reducing the risk that a
    patient will miss a treatment.
•
Adaptability.
Hydron Technology can be adapted to deliver
    many types of drugs. In addition, it provides a controlled and
    even drug release over a period of time that can result in
    increased efficacy and safety.
•
Decreased Cost.
As a result of the reduced number of
    patient visits to doctors' offices, the overall costs
    associated with such visits, including scheduling, office visit
    and reimbursement claim costs, are significantly lowered. In
    addition, use of Hydron Technology lessens the administrative
    burden on private insurance and Medicare by reducing the number
    of reimbursement claims processed per year.
Finally, since Vantas is based on Hydron Technology, we believe
that the regulatory approval of Vantas may be helpful in
obtaining approval of our product candidates that utilize this
technology.
Our Business Strategy
In addition to increasing sales of our approved product, Vantas,
our goal is to develop and commercialize products for the
treatment of urological and endocrine conditions, diseases and
disorders. To achieve this goal, our strategy includes the
following key elements:
•
Continue to Focus on Urological and Endocrine Conditions,
    Diseases and Disorders.
We intend to continue to focus on
    the development and commercialization of products for the
    treatment of urological and endocrine conditions, diseases and
    disorders. Our aim is to build our urological and endocrine
    product portfolio and opportunistically acquire or in-license
    later-stage urological and endocrine products that are currently
    on the market or require minimal development expenditures, or
    have some patent protection or potential for market exclusivity
    or product differentiation. We intend to collaborate with major
    and specialty pharmaceutical companies to develop and
    commercialize products that are outside of our core urology and
    endocrinology focus.
•
Develop Proprietary Pharmaceutical Portfolio.
We are
    building a product portfolio based on Hydron Technology. We have
    demonstrated the utility of Hydron Technology through Vantas and
    we believe that we can utilize this technology to bring
    additional products to market. We intend to apply Hydron
    Technology to the delivery of drugs with established safety and
    efficacy profiles to reduce product development risk and speed
    time to market.
•
Develop or Acquire New Drug Delivery Technologies.
In
    addition to Hydron Technology, we intend to continue to evaluate
    other drug delivery technologies as candidates for in-license,
    acquisition and development, including various implantable
    technologies and other drug delivery systems. We believe that,
    by devoting our resources to continued development of new drug
    delivery technologies, we can develop a broader base that will
    enable us to deliver a greater variety of drugs than would be
    possible using a single drug delivery technology.
•
Leverage Sales and Marketing Expertise.
We will continue
    to expand our commercialization efforts by leveraging our
    existing sales and marketing expertise to market new products as
    they are approved. We intend to expand our sales force,
    currently consisting of approximately 40 employees,
    incrementally in a cost-effective manner and expand or realign
    territories as products emerge from our development pipeline or
    are acquired.
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•
Partner Outside the U.S. to Reach New Geographic Markets.
To reach markets outside the U.S., we intend to pursue primarily
    a licensing strategy, whereby we partner with companies with a
    local presence and proven distribution channels in the urology
    and endocrinology markets for distribution of our products. We
    may retain co-marketing rights, however, on a select
    territory-by-territory basis to further leverage our sales and
    marketing expertise.
Sales and Marketing and Distribution
Our sales force consists of approximately 40 employees. Our
product specialists have an average of seven years of
pharmaceutical sales experience and the majority of our sales
force have sold other LHRH agonist products prior to joining us.
At present, we are calling on the urologists that account for
the majority of LHRH agonist products in the U.S. As revenue
increases and resources become available, we intend to scale up
our sales force. We continue to analyze physician prescribing
habits so that we can direct our product specialists to
physicians who maintain the largest prostate cancer practices.
We will also evaluate the need to hire additional product
specialists as we get closer to acquiring a new product or
launching VP002, our histrelin implant for CPP. By adjusting our
current sales force structure slightly, we will be able to call
on our current physician base and on physicians in additional
specialty areas, such as endocrinology. Further, we believe that
the direct physician distribution channel of Vantas may present
a barrier to the future entry of competition from generic
products because generic drug companies do not typically have a
field sales force.
Our product specialists utilize various promotional materials
when making clinical presentations, including, instructional
videos on proper implantation technique. In remote areas where
our product specialists cannot productively make personal
visits, we conduct direct mail programs and telemarketing
campaigns. We also supply physicians, health plan administrators
and specialty pharmacies with a pharmaco-economic model to
demonstrate the cost effectiveness of Vantas compared to LHRH
agonist products due to decreased utilization of staff time for
repeated injections and one reimbursement claim per patient per
year as opposed to three or four.
Additionally, we support sales efforts by employing a wide range
of marketing programs to promote Vantas, including journal
advertising, industry publications, medical educational
conferences and internet initiatives. We will hold meetings in
major cities where a Vantas clinical investigator presents data
about Vantas, relates his own impressions and demonstrates
proper implantation technique. In addition, our product
specialists plan to utilize local thought leaders as peer
influence speakers in their specific markets.
As part of our marketing strategy, we have entered into a group
purchasing agreement with IUN, a subsidiary of AmerisourceBergen
Corporation. IUN was founded in 2001 as a GPO for over 40% of
all practicing urologists. This network designs and supports
practice management, business planning and accredited continuing
medical education for all of its members. Our agreement with IUN
includes access to their physician members, support from their
strategic account managers and services from two other
AmerisourceBergen subsidiaries: US Bioservices Corporation, a
specialty pharmacy, and Besse Medical Supply, a wholesale
distributor for many GPOs, including IUN. Under the agreement,
physician practices and clients who are members of IUN or US
Bioservices are eligible to purchase Vantas directly from Besse
Medical. In addition, US Bioservices can dispense Vantas
purchased under the agreement to patients of member physicians
upon request by healthcare providers, patients, or third party
payors, as well as provide drug management and patient care
support services.
IUN will inform its members about the terms of the purchasing
arrangements, as well as provide them with appropriate clinical
and scientific information about Vantas. If certain sales
targets are achieved, IUN will provide additional educational
services to its members with respect to Vantas. In addition, IUN
will supply us with member information, including authorized
specialty distributors and wholesalers of the members.
Outside the U.S., we intend to primarily pursue a licensing
strategy, whereby we partner with companies with a local
presence and proven distribution channels in the urology market
for distribution of Vantas. We may retain co-marketing rights,
however, on a select territory-by-territory, basis. For example,
we have executed an agreement with Paladin Labs, Inc., a
Canadian company, under which it will distribute Vantas
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and file all required regulatory applications in Canada, and
have signed a similar agreements with Key Oncologics
(Pty) Ltd., a South African company, and BioPro
Pharmaceutical, Inc., a marketing organization specializing in
oncology drugs in the pan Asian region. We are actively seeking
relationships or distribution arrangements with additional GPOs,
specialty pharmacies and local companies abroad.
Reimbursement
Advanced prostate cancer is generally treated by urologists in
their offices. LHRH agonist products are sold directly from the
pharmaceutical manufacturer to the physician and are
administered in the office through injections or a 12-month
implant. Once a physician acquires and administers the LHRH
agonist product, he files a claim with Medicare or the
patient's private insurance for reimbursement.
Approximately 70% of patients diagnosed with prostate cancer and
receiving LHRH agonist therapy are over the age of 65 and
therefore covered by Medicare. In light of this, we have
retained a group of Medicare experts to monitor pricing of LHRH
agonist products and Medicare reimbursement environment.
Medicare reimbursement for LHRH agonist therapy is in two parts.
The first part of the reimbursement is based on the
manufacturers' average sales price, or ASP. This method was
introduced in 2005. Under the ASP method, each LHRH agonist
product manufacturer must calculate a quarterly average unit
sales price and report it to the Centers for Medicare and
Medicaid Services (CMS). CMS will then post the ASP on their web
page for the physicians to reference. A physician will be
reimbursed by Medicare at 106% of the ASP. The second part of
the reimbursement is derived from the actual procedure the
physician completes to administer the LHRH agonist product. A
physician can expect to receive approximately $125 for an
implant procedure, such as Vantas, as compared to $28 for an
injection procedure.
Reimbursement is often confusing and requires exacting
procedures in order to be honored by Medicare or private
insurance carriers. As a result, we have set up a toll-free
phone number for physicians to call for help in resolving any
billing issues concerning reimbursement for Vantas.
Intellectual Property
Our success will depend in large part on our ability to maintain
a proprietary position in our products and product candidates
through patents, trade secrets and FDA exclusivity. We rely upon
patents, trade secrets, know-how and continuing technological
innovation to develop and maintain our competitive position. We
plan to aggressively protect and defend our proprietary position.
As of February 2005, we own three issued U.S. patents and
24 issued foreign patents relating to our Hydron Technology. We
own five pending foreign patent applications relating to our
Hydron Technology. Our patents and patent applications cover a
variety of novel pharmaceutical formulations, methods of use,
and processes to manufacture hydrogel polymers and implants
incorporating active agents. Within the Hydron Technology patent
portfolio, we own two issued U.S. patents and 24 issued
foreign patents relating to Vantas. We own one pending foreign
patent application relating to Vantas.
The following table sets forth information related to U.S. and
foreign patents and patent applications owned by us:
Date of
No. of
No. of Pending
Grant/
Technology Family
Brief Description of Coverage
Patents
Applications
Expiration
Water-Swellable Hydrophilic Articles
Method of preparing a hydrophilic plastic cartridge
15
0
1994/2011
Homogenous Hydrogel Copolymers
Method of preparing homogeneous copolymers having a
    predetermined equilibrium water content value
10
1
1993/2010
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Date of
No. of
No. of Pending
Grant/
Technology Family
Brief Description of Coverage
Patents
Applications
Expiration
Hydrogel Composition
Method of preparing homogenous porous hydrogel
1
4
2002/2020
Implanting Device
Device for inserting implantable objects under the skin
0
2
Not Applicable/ 2023
Implanting Device Design
Design for an implanting device
3
2
2004/2017
Compositions and Treatments for Central Precocious Puberty
Controlled delivery of gonadotropin- release hormone agonists
    for the treatment of central precocious puberty
0
1
Not Applicable/ 2025
Polyurethane Implant Formulations
Polyurethane implant formulations and methods of preparing
0
1
Not Applicable/ 2024
Total
29
11
We have filed U.S. and foreign patent applications covering
pharmaceutical formulations, processes and methods of use
relating to VP002 (histrelin) for CPP. In addition, as of
February 2005, we also own three other issued patents and have
approximately five other patent applications pending worldwide
relating to other areas, including implanting devices and
designs thereof.
Our commercial success will depend in part on obtaining this
patent protection. Other intellectual property and know-how,
including the Hydron Technology, that we have produced and own,
are safeguarded through copyrights, trademarks, trade secret
protections and contractual safeguards such as confidentiality
and proprietary information agreements. The development of our
technology and many of our processes are dependent upon the
knowledge, experience and skills of key scientific and technical
personnel. To protect our rights to this proprietary information
and technology, which are not patentable, we require all
employees, consultants and advisors to enter into
confidentiality agreements that prohibit the disclosure of
confidential information to anyone outside our company. As a
matter of company policy, all scientific employees are
"hired to invent" and all have executed agreements
that recognize this policy and generally require disclosure and
assignment to us of ideas, developments, discoveries and
inventions made by employees. However, these agreements may not
effectively prevent disclosure of our confidential information
or provide meaningful protection for our confidential
information if there is unauthorized use or disclosure.
Material Agreements
We are a party to certain material agreements including:
GP Strategies Corporation
In June 2000, we entered into a contribution agreement with GP
Strategies Corporation, our former parent. Under this
contribution agreement, GP Strategies contributed, assigned,
transferred and conveyed to us the assets of GP Strategies'
drug delivery business, including all intellectual property and
certain agreements with Hydron Technologies, Inc., formerly
known as Dento-Med Industries, Inc., The Population Council,
Inc., and Shire US Inc., successor to Roberts Laboratories Inc.
We assumed all assets, liabilities and obligations of GP
Strategies relating or arising from the operation of the drug
delivery business and the assets.
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Hydron Technologies, Inc.
In November 1989, National Patent Development Corporation
entered into an agreement with Dento-Med Industries, Inc., now
known as Hydron Technologies. Under the contribution agreement
in June 2000 between us and GP Strategies, GP Strategies
transferred its rights and obligations under the agreement with
Hydron Technologies to us.
Under the agreement, Hydron Technologies was granted an
exclusive, worldwide license, with the right to grant
sublicenses, in and to presently owned or subsequently issued
patents and the Hydron trademark, to manufacture, market or use
products composed of the Hydron polymer or produced with the use
of the Hydron polymer in certain consumer and oral health
fields, excluding prescription and non-prescription drugs. The
agreement purports to continue indefinitely, unless terminated
earlier by the parties. We have the exclusive right to
manufacture, sell or distribute any prescription drug or medical
device as defined under the Federal Food, Drug and Cosmetic Act
made with the Hydron polymer, however, we will not have the
right to sell or distribute any Hydron polymer product in the
oral health field, except for prescription drug products for lip
sores and oral ulcers. We also have the exclusive right to
manufacture, sell or distribute certain other excepted Hydron
products from Hydron Technologies' license. Neither party
is prohibited from manufacturing, exploiting, using or
transferring the rights to any new non-prescription drug product
containing the Hydron polymer, subject to certain exceptions,
for limited exclusivity periods.
In the event we withdraw from the business of manufacturing the
Hydron polymer, we shall assign all of our right and interest in
the Hydron trademark to Hydron Technologies. Upon request from
Hydron Technologies, we may provide certain research services,
including limited use of our facilities, for Hydron
Technologies' research activities, for which we will be
reimbursed a specified amount. In addition, subject to certain
conditions and exceptions, Hydron Technologies has the right to
purchase from us and we are obligated to supply to Hydron
Technologies certain types of Hydron polymers.
Subject to certain exceptions (including Vantas), each party
will pay to the other a 5% royalty on net sales for Hydron
polymer products marketed by us or Hydron Technology, as
applicable, or a third party. Subject to certain excepted Hydron
polymer products, in the event either party sells any
non-prescription Hydron polymer drug products itself, such party
will pay a 5% royalty fee on net sales, including research
payments, to the other party. Subject to certain Hydron polymer
excepted products, if either party sells non-prescription drug
products to a third party and receives up-front license fees,
royalties or similar payments, such party will pay a 25% royalty
on such payments to the other.
The Population Council
In September 1990, National Patent Development Corporation
entered into a joint development agreement with The Population
Council regarding the development of hydrogel implants
containing LHRH. Under the contribution agreement entered into
in June 2000 between us and GP Strategies,
GP Strategies transferred its rights and obligations under
the agreement with The Population Council to us.
By amendment to the agreement dated October 1, 1997, the
Joint Development Agreement was terminated in its entirety and
superseded by the terms and conditions of the amendment. Under
the amendment, The Population Council concluded all ongoing
prostate cancer clinical studies and provided us with all data
and records relating to those trials to enable us to advance the
clinical trials and seek regulatory approval to commercially
develop and market any polymer implant containing any LHRH
analog or any polymer implant containing any other active agent,
other than an LHRH analog. We can enter into licensing and
marketing agreements for the commercial development of those
implants without the consent of The Population Council. The term
of the agreement is the shorter of twenty five years from the
date of the amendment or until the date on which The Population
Council receives approximately $40,000,000 in payments from us.
By a further amendment to the agreement dated August 2004, The
Population Council is entitled to 30% of certain revenues
received by us from the licensing of Vantas or any other polymer
implant containing an LHRH analog and 5% of certain revenues
received by us from the licensing of any other polymer implant to
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the extent those revenues are related to the use or sale of
implants in all areas other than the European Union and certain
Southeast Asian countries. We are required to pay to The
Population Council 3% of our net sales of Vantas and any polymer
implant containing an LHRH analog and 0.5% of our net sales of
any other polymer implant. The Population Council is also
entitled to 4% of any licensee's net sales of Vantas and
any other polymer implant containing an LHRH analog within the
European Union and certain Southeast Asian countries and 0.667%
of any licensee's net sales for any other polymer implant
within the European Union and certain Southeast Asian countries.
In addition, we are required to establish a patient assistance
program within one year after the first commercial sale of
Vantas in the U.S. and maintain the program for a period ending
on the earlier of ten years after establishment of the program
or the cessation of the marketing of Vantas.
Shire Pharmaceuticals Group plc
In March 1998, GP Strategies entered into a license
agreement and a related manufacturing and supply agreement with
Roberts Laboratories Inc. under which Roberts was responsible
for conducting Phase III clinical trials, managing the
regulatory approval process and marketing the product now known
as Vantas. When Roberts was acquired by Shire Pharmaceuticals
Group in December 1999, Shire took over the development of
Vantas. In December 2001, we entered into a termination,
license back and option agreement with Shire US, a
subsidiary of Shire Pharmaceuticals Group, which terminated and
released all claims of the parties under the previous license
and manufacturing agreements. Under this agreement, Shire
transferred to us all on-going activities under the development
program for Vantas, including all data, know-how and other
information with respect to Vantas generated in connection with
the development program, and granted us an exclusive license to
such data, know-how and information for the development,
manufacture, use, supply and sale of Vantas in the designated
territory, including, but not limited to, the U.S., Canada, and
various European and other countries. We must use our reasonable
efforts to secure a sublicense for the purposes of developing
and commercializing Vantas, however, we may market Vantas in the
U.S.
The term of the license continues for ten years from the date of
the first commercial sale of Vantas. Thereafter, we will have a
fully paid up license in the designated territory with respect
to all data, know-how and other information related to Vantas
generated under Shire's previous development program for
Vantas.
We are required to pay Shire 2% of net sales of Vantas in the
designated territory. However, for the purposes of this
agreement, net sales are reduced by the amount of any royalty
payments we make to the Population Council with respect to sales
of Vantas. If we sublicense Vantas to another entity in the
designated territory, we will pay Shire fees of 20% of royalty
income and 20% of any milestone payments we receive, up to a
maximum of $5,000,000, relating to any sublicensing of Vantas.
Royalty income does not include amounts paid to The Population
Council with respect to sales of Vantas by a sublicensee.
However, the $5,000,000 cap on our royalties payments with
respect to milestone payments is only applicable if we are
entitled to receive at least 10% of net sales under the
sublicense agreement.
We also granted Shire an exclusive, irrevocable option, on a
country-by-country basis in the designated territory, to
exclusively market and distribute Vantas in each country of the
designated territory, other than in the U.S. This option,
with respect to each country, will expire on the earlier of the
date we enter into a sublicense agreement for that particular
country or 180 days following the date of regulatory
approval in that particular country for Vantas. We may market
Vantas in any country at the expiration of the option with
respect to that country. Upon exercise of the option, with
respect to a particular county, Shire is obligated to pay us
milestone payments of $2,000,000 in respect of the European
Union and $500,000 in respect of any other countries within the
designated territory. This amount will be reduced by $250,000 if
we enter into a sublicense agreement within the European Union.
These milestone payments are payable with respect to a
particular country when Vantas is approved for marketing in the
applicable country. If Shire exercises the option with respect
to a particular country, we will supply Vantas at the cost of
manufacture. Shire will pay us 13.5% of its net sales within the
option territory. Each marketing and distribution arrangement
requested by Shire under its option will have a term of
10 years.
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Paladin Labs, Inc.
In October 2002, we entered into a license and distribution
agreement with Paladin Labs under which we granted Paladin Labs
an exclusive, royalty bearing license under our intellectual
property, including our patents, trademarks and know-how, to
seek regulatory approval for the marketing, distribution and
sale in Canada and its territories of (i) Vantas for the
treatment of prostate cancer and (ii) any other Hydron
histrelin implant, which is, or may be, developed by us for
other indications. Paladin Labs also has the exclusive right to
market, distribute and sell in Canada and its territories,
Vantas and any other Hydron histrelin implant for any such
indication. Paladin Labs is obligated to use commercially
reasonable efforts to apply for and maintain regulatory approval
for Vantas and any other Hydron histrelin implant and to sell,
market and distribute those implants in Canada and its
territories. The initial term of the agreement is for fifteen
years after the date on which regulatory approval for Vantas in
Canada is obtained for the treatment of advanced prostate cancer
and will automatically renew for subsequent three year terms,
unless terminated earlier. We also granted Paladin Labs an
exclusive license to use the trademarks owned by us, including
all trademarks and trade names approved by us, in connection
with the marketing, distribution and sale of Vantas or any other
Hydron histrelin implant in the designated territory. We have
given Paladin Labs the exclusive right, but not the obligation,
to conduct Phase IV clinical trials relating to the use of
Vantas for the treatment of prostate cancer in the designated
territory. If Paladin Labs does not conduct such trials within
one year of our request to do so, we will have the right to
conduct such Phase IV clinical trials on our own.
We have the sole right and responsibility for the manufacturing,
assembling, packaging and labeling of Vantas or any other Hydron
histrelin implant in such quantities required for Paladin
Labs' demand forecast and we must use all reasonable
efforts to supply those products. In addition, Paladin granted
us a non-exclusive license to use its trademarks on labeling of
Vantas or any other Hydron histrelin implant. We have agreed not
to supply Vantas or any other Hydron histrelin implant for
distribution or sale in Canada and its territories for use in
any indication to any other party except Paladin Labs. Paladin
Labs will pay us a flat transfer fee of $190 per unit and a
royalty of 8% of its net sales of Vantas or any other Hydron
histrelin implant.
We are obligated to use commercially reasonable efforts to
complete all necessary pre-clinical and clinical trials that are
required by the Therapeutic Products Directorate of Health
Canada, Canada's federal regulatory authority for
pharmaceutical drugs, for use of Vantas in the treatment of
prostate cancer in Canada. However, we are not required to
undertake any pre-clinical or clinical trials beyond those
activities conducted in the U.S. and Canada. If the Therapeutic
Products Directorate of Health Canada requires pre-clinical or
clinical activities beyond those activities currently being
undertaken by us at our own expense to obtain approval to sell
Vantas, we will pay the first $250,000 of such pre-clinical
and/or clinical activities and Paladin Labs shall pay all
amounts above $250,000.
Under the terms of the agreement, we and Paladin have agreed not
to develop, market, distribute or sell in Canada or its
territories any products that contain the same active ingredient
as that which is contained in Vantas, or any products similar to
or competitive with Vantas or any other Hydron histrelin implant
approved in Canada during the term of the agreement and for a
period of three years following the expiration or termination of
the agreement; provided that we are permitted to make, market,
distribute and sell Vantas in the designated territory for all
indications following the expiration or termination of the
agreement.
Key Oncologics (Pty) Ltd.
In September 2003, we entered into a license and
distribution agreement with Key Oncologics, under which we
appointed Key Oncologics as the exclusive agent to apply for
regulatory approval for and distribute Vantas in South Africa
and its territories for use in the treatment of prostate cancer.
The initial term of the agreement is for five years after the
date on which regulatory approval for Vantas for the treatment
of prostate cancer is obtained in South Africa, subject to
automatic one year renewal periods unless terminated earlier.
Key Oncologics is obligated to use commercially reasonable
efforts to apply for and maintain regulatory approval in South
Africa for Vantas for use in the treatment of prostate cancer.
Key Oncologics is required to use its best efforts to market,
distribute and sell Vantas in South Africa.
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We have agreed to supply Vantas, as well as containers for and
components of Vantas, to Key Oncologics exclusively in South
Africa. We are obligated to supply Key Oncologics with all data
and information in our possession or control as is necessary for
the purpose of obtaining regulatory approval of Vantas for use
in the treatment of prostate cancer in South Africa. We have
given Key Oncologics the exclusive right, but not the
obligation, to conduct Phase IV clinical trials relating to
the use of Vantas for the treatment of prostate cancer in the
designated territory. If Key Oncologics does not conduct such
trials within one year of our request to do so, we will have the
right to conduct such Phase IV clinical trials on our own.
We will receive a perpetual, fully-paid, royalty-free license to
use any data developed by Key Oncologics in the Phase IV
trials.
Under the terms of the agreement, Key Oncologics has agreed not
to develop, market, distribute or sell in South Africa any
products that contain the same active ingredient contained in
Vantas, or any products similar to or competitive with Vantas
that are used to treat prostate cancer during the term of the
agreement and for a period of three years following the
expiration or termination of the agreement, except that Key
Oncologics may market, distribute and sell a certain product
under a previous third party license agreement.
We have granted Key Oncologics an exclusive license to use our
trademarks owned by us, including all trademarks and trade names
approved by us, in connection with the marketing, distribution
and sale of Vantas in South Africa in connection with the
treatment of prostate cancer. Key Oncologics has granted us a
non-exclusive license to use Key Oncologics' trademarks on
labeling of Vantas. We have the sole right and responsibility
for manufacturing, assembling, packaging and labeling Vantas and
we are required to supply Vantas in sufficient quantities to
meet Key Oncologics' demand forecast. We have agreed not to
supply Vantas for distribution or sale in any of the designated
countries for use in the treatment of prostate cancer to any
other party except Key Oncologics. For a period of twelve months
following the receipt of regulatory approval, Key Oncologics
will pay us a flat transfer fee of $250 per unit of Vantas,
plus 10% of the net sales collected by Key Oncologics. After the
end of the first twelve-month period, we will have the right to
adjust the price per unit once per year, subject to certain
exceptions.
International Urology Network
In November 2004, to supplement our own marketing and
distribution efforts, we entered into two group purchasing
agreements with the group purchasing organization, IUN, to make
Vantas available for purchase to members of IUN with respect to
facilities located in the U.S. One of the agreements was entered
into by IUN on behalf of U.S. Urology. The term of the
agreements is for one year, commencing on December 1, 2004.
Under the agreements, physician practices and clients who are
members of IUN or US Bioservices, Inc. a specialty
pharmacy, are eligible to purchase Vantas directly from Besse
Medical, IUN's wholesale distributor. In addition,
US Bioservices can dispense Vantas purchased under the
agreements to patients of member physicians upon request by
healthcare providers, patients, or third party payors, as well
as provide drug management and patient care support services.
IUN will inform its members about the terms of the purchasing
arrangements, as well as provide them with appropriate clinical
and scientific information about Vantas. If certain sales
targets are achieved, IUN will provide additional educational
services to its members with respect to Vantas. In addition, IUN
will supply us with member information, including a list of all
member and authorized specialty distributors and wholesalers of
the members.
Under the agreements, we are required to pay IUN a fee equal to
2.5% of the sales of Vantas through Besse Medical, as well as
administrative fees equal to 4% of the aggregate charge back
sales of Vantas to eligible members.
BioPro Pharmaceutical, Inc.
In January 2005, we entered into an exclusive license and
distribution agreement with BioPro. The initial term of the
agreement is for ten years after the date on which the first
regulatory approval allowing sales of
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Vantas to proceed in any country of the designated territory is
issued, unless terminated earlier and automatically renews for
additional periods of one year unless notice of termination is
given.
Under the agreement, BioPro will be the exclusive distributor of
Vantas in the designated territory consisting of Brunei,
Cambodia, China (including Hong Kong), Laos, India, Indonesia,
Malaysia, the Philippines, Singapore, South Korea, Taiwan,
Thailand and Vietnam. BioPro is required to use commercially
reasonable efforts to apply for and maintain regulatory approval
for Vantas for the treatment of prostate cancer in the
designated territory. In connection with obtaining regulatory
approval for Vantas, we are required to supply BioPro with all
data and information in our possession or control as is
necessary for that purpose. We also granted BioPro an exclusive
license to use the trademarks owned by us, including all
trademarks and trade names approved by us, in connection with
the marketing, distribution and sale of Vantas in the designated
territory. We have given BioPro the non-exclusive right, but not
the obligation, to conduct Phase IV clinical trials
relating to the use of Vantas for the palliative treatment of
prostate cancer in each country of the designated territory.
BioPro granted us the right to use BioPro's trademarks on
labeling of Vantas. We have the sole right and responsibility to
manufacture, assemble, package and label Vantas and are required
to supply Vantas in quantities sufficient to meet BioPro's
demand forecast. We have agreed not to supply Vantas for
distribution or sale in any of the countries in the designated
territory for use in any indication to any other party except
BioPro. BioPro shall pay us a flat transfer fee of $250 per
unit and a royalty of 25% of net sales of Vantas, in addition to
various milestone payments. BioPro must pay us a minimum amount
if it fails to achieve certain minimum net sales. In addition,
BioPro is obligated to pay a royalty of 2% of net sales of
Vantas directly to The Population Council or a minimum payment
if certain minimum net sales are not achieved. Twelve months
following the first commercial sales of Vantas in the designated
territory, we will have the right, subject to certain
exceptions, to adjust the price per unit once per year.
Manufacturing and Facilities
We maintain our headquarters and manufacturing facility in
Cranbury, New Jersey in one leased facility consisting of a
total of 51,046 square feet. The following table sets forth
more information regarding our facilities.
Address
Square Feet
Function
Lease Expiration
7 Clarke Drive
Cranbury, NJ
21,274
Research and Development;
Administration
2014
8 Clarke Drive
Cranbury, NJ
29,772
Manufacturing
2014
Our manufacturing facility is subject to periodic inspections by
the FDA and other federal and state regulatory agencies and is
subject to cGMP regulations. Our existing manufacturing
facilities are capable of producing commercial quantities of our
implants. In order to achieve cost-effective production, we have
developed proprietary equipment and scalable commercial
manufacturing methods that we use in our production line. We
believe that our current manufacturing facilities, as well as
the space under construction, will provide sufficient capacity
to meet our current needs and support the introduction of new
products over the next several years, and that suitable
additional space will be available in the future on commercially
reasonable terms as needed.
Competition
The biotechnology and pharmaceutical industries are very
competitive. In particular, competition for the development and
marketing of urological and endocrine pharmaceutical products is
intense and is expected to increase. Many of our competitors
have substantially greater financial and other resources, larger
research and development staffs and more experience developing
products, obtaining FDA and other regulatory approval of
products and manufacturing and marketing products. We compete
against all pharmaceutical companies that
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manufacture or market LHRH agonist products. In addition, we
compete against biotechnology companies, universities,
government agencies, and other research institutions in the
development of urological and endocrine products, technologies
and processes that are, or in the future may be, the basis for
competitive commercial products.
In particular, we compete against the following LHRH agonist
products for the palliative treatment of advanced prostate
cancer: TAP Pharmaceutical Products' Lupron and
Sanofi-Aventis' Eligard, both multiple injection
formulations that deliver leuprolide; AstraZeneca's
Zoladex, a biodegradable rod that delivers goserelin for up to
three months; and Bayer Pharmaceuticals' Viadur, a rigid
metal implant that releases leuprolide over a 12-month period.
With respect to our endocrine pharmaceuticals in late-stage
development for the treatment of CPP and acromegaly, our
competitors currently include TAP Pharmaceutical Products'
Lupron Depot-PED and Novartis' Sandostatin injections and
Sandostatin LAR Depots and Pfizer's Somavert. We believe
that Vantas represents a more comfortable and convenient
alternative to competing products because it eliminates the
requirement of multiple physician visits and repeated
injections, and is smaller, softer and more flexible than other
implants.
Regulatory Issues
General
The production, distribution and marketing of products employing
our technology, and our research and development activities, are
subject to extensive governmental regulation in the U.S. and in
other countries. In the U.S., our product candidates are
regulated as drugs, and are subject to the Federal Food, Drug
and Cosmetic Act, the Public Health Service Act and the
regulations promulgated under these statutes, as well as to
other federal, state and local statutes and regulations. These
laws govern the clinical and non-clinical testing, manufacture,
safety, effectiveness, approval, labeling, distribution, import,
export, storage, record keeping, reporting, advertising and
promotion of our products. Product development and approval
within this regulatory framework, if successful, will take many
years and involve the expenditure of substantial resources.
Violation of regulatory requirements at any stage may result in
various adverse consequences, including FDA's delay in
approving or refusal to approve a product. Violations of
regulatory requirements also may result in enforcement actions
including withdrawal of approval, labeling restrictions, seizure
of products, fines, injunctions and civil or criminal penalties.
Research, Development and Product Approval Process
The research, development and approval process in the U.S. is
intensive and rigorous, and generally takes many years. The
typical process required by the FDA before a therapeutic drug
may be marketed in the U.S. includes:
•
pre-clinical laboratory and animal tests and analysis;
•
submission to the FDA of an application for an investigational
    new drug application, which must become effective before human
    clinical trials may commence;
•
preliminary human clinical studies to evaluate the drug and its
    manner of use;
•
adequate and well-controlled human clinical trials to establish
    whether the drug is safe and effective for its intended uses;
•
FDA review of whether the facility in which the drug is
    manufactured, processed, packed or held meets standards designed
    to assure the product's continued quality; and
•
submission and approval of an appropriate product application to
    the FDA, and approval of the application by the FDA.
During pre-clinical testing, studies are performed with respect
to the chemical and physical properties of candidate
formulations. Biological testing is typically done in animal
models to demonstrate the activity of the compound against the
targeted disease or condition and to assess the apparent effects
of the new product
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candidate on various organ systems, as well as its relative
therapeutic effectiveness and safety. An investigational new
drug application must be submitted to the FDA and become
effective before studies in humans may commence.
In the U.S., clinical trial programs in humans generally follow
a three-phase process:
•
Phase I studies are typically conducted in small numbers of
    healthy volunteers or, on occasion, in patients afflicted with
    the target disease, to determine the metabolic and
    pharmacological action of the product candidate in humans, the
    side effects associated with increasing doses, and, if possible,
    to gain early evidence of effectiveness.
•
Phase II studies are generally conducted in larger groups
    of patients having the target disease or condition in order to
    validate the clinical endpoint and to obtain preliminary data on
    both the effectiveness of the product candidate and optimal
    dosage. This phase also helps determine further the safety
    profile of the product candidate.
•
Phase III large-scale clinical trials are generally
    conducted in hundreds of patients having the target disease or
    condition to provide sufficient data for the statistical proof
    of effectiveness and safety of the product candidate.
In the case of products for cancer and certain other
life-threatening diseases, however, the initial Phase I
testing may be done in patients with the disease rather than in
healthy volunteers. Because these patients are already afflicted
with the target disease or condition, it is possible that such
studies will provide results traditionally obtained in
Phase II studies. These studies are often referred to as
"Phase I/II" studies. Even if patients are used
in initial human testing in a Phase I/II study, the sponsor
is still responsible for obtaining all the data usually obtained
in both Phase I and Phase II studies.
U.S. law requires that studies conducted to support
approval for product marketing be "adequate and well
controlled." In general, this means that either a placebo
or a product already approved for the treatment of the disease
or condition under study must be used as a reference control.
Studies must also be conducted in compliance with the FDA's
good clinical practice regulations.
The clinical trial process can take up to ten years or more to
complete, and the data may not be collected in compliance with
good clinical practice regulations, demonstrate that the product
is safe or effective, or be sufficient to support FDA approval
of the product candidate. The FDA may place clinical trials on
hold at any point in this process if, among other reasons, it
concludes that clinical subjects are being exposed to an
unacceptable health risk. Trials may also be terminated by
institutional review boards, which must review and approve all
research involving human subjects. Side effects or adverse
events that are reported during clinical trials can delay,
impede or prevent marketing authorization. Similarly, adverse
events that are reported after marketing authorization can
result in additional limitations being placed on a
product's use and, potentially, withdrawal of the product
from the market. Any adverse event, either before or after
marketing authorization, can result in liability claims against
us.
During the course of, and following the completion of clinical
trials, the data are analyzed to determine whether the trials
successfully demonstrated safety and effectiveness and whether a
product approval application may be submitted. In the U.S., if
the product is regulated as a drug, a new drug application must
be submitted and approved before commercial marketing may begin.
The FDA Center for Drug Evaluation and Research, known as CDER,
has responsibility for the review and approval of drugs. The new
drug application must include a substantial amount of data and
other information concerning the safety and effectiveness of the
compound from laboratory, animal and clinical testing, as well
as data and information on manufacturing, product stability and
proposed product labeling.
Each domestic and foreign biopharmaceutical manufacturing
establishment, including any contract manufacturers we may
decide to use must be listed in the new drug application and
must be registered with the FDA. The application will not be
approved until the FDA conducts a manufacturing inspection,
approves the applicable manufacturing process for the drug
product and determines that the facility is in compliance
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with the FDA's current good manufacturing practice
requirements. If the manufacturing facilities and processes fail
to pass the FDA inspection, we will not receive approval to
market these products.
Under the Prescription Drug User Fee Act, the FDA receives fees
for reviewing a new drug application and supplements thereto, as
well as annual fees for both commercial manufacturing
establishments and approved products. These fees can be
significant. The new drug application review fee alone can
exceed $0.5 million, although certain deferrals, waivers
and reductions may be available.
Under applicable laws and FDA regulations, each new drug
application submitted for FDA approval is usually reviewed for
administrative completeness and reviewability within 45 to
60 days following submission of the application. If deemed
complete, the FDA will "file" the new drug
application, thereby triggering substantive review of the
application. The FDA can refuse to file any new drug application
that it deems incomplete or not properly reviewable. If the FDA
refuses to file an application, the FDA will retain 25% percent
of the user fee as a penalty. The FDA has established
performance goals for the review of new drug
applications — six months for priority applications
and ten months for regular applications. However, the FDA is not
legally required to complete its review within these periods and
these performance goals may change over time. Moreover, the
outcome of the review, even if generally favorable, typically is
not an actual approval but an "action letter" that
describes additional work that must be done before the
application can be approved. The FDA's review of an
application may involve review and recommendations by an
independent FDA advisory committee. Even if the FDA approves a
product, it may limit the approved therapeutic uses for the
product as described in the product labeling, require that
warning statements be included in the product labeling, require
that additional studies be conducted following approval as a
condition of the approval or otherwise limit the scope of any
approval.
Significant legal and regulatory requirements also apply after
FDA approval to market under a new drug application. These
include, among other things, requirements related to adverse
events and other reporting, product advertising and promotion
and ongoing adherence to current good manufacturing practices,
as well as the need to submit appropriate new or supplemental
applications and obtain FDA approval for certain changes to the
approved product, product labeling or manufacturing process. The
FDA also enforces the requirements of the Prescription Drug
Marketing Act, which, among other things, imposes various
requirements in connection with the distribution of product
samples to physicians.
Overall research, development and approval times depend on a
number of factors, including the period of review at the FDA,
the number of questions posed by the FDA during review, how long
it takes to respond to the FDA questions, the severity of
life-threatening nature of the disease in question, the
available of alternative treatments, the availability of
clinical investigators and eligible patients, the rate of
enrollment of patients in clinical trials and the risks and
benefits demonstrated in the clinical trials.
Drugs for Serious or Life-threatening Illnesses
The Federal Food, Drug and Cosmetic Act and FDA regulations
provide certain mechanisms for the accelerated "Fast
Track" approval of products intended to treat serious or
life-threatening illnesses which have been studied for safety
and effectiveness and which demonstrate the potential to address
unmet medical needs. The procedures permit early consultation
and commitment from the FDA regarding the pre-clinical and
clinical studies necessary to gain marketing approval.
Provisions of this regulatory framework also permit, in certain
cases, new drug applications to be approved on the basis of
valid surrogate markers of product effectiveness, thus
accelerating the normal approval process. Certain product
candidates employing our Hydron Technology might qualify for
this accelerated regulatory procedure. However, the FDA may not
agree, and even if the FDA agrees that these products qualify
for accelerated approval procedures, the FDA may deny approval
of our drugs or may require that additional studies be required
before approval. The FDA may also require us to perform
post-approval, or Phase IV, studies as a condition of such
early approval. In addition, the FDA may impose restrictions on
distribution and promotion in connection with any accelerated
approval and may withdraw approval if post-approval studies do
not confirm the intended clinical benefit or safety of the
product candidates.
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Other U.S. Regulatory Requirements
In the U.S., the research, manufacturing, distribution, sale and
promotion of drugs may also be subject to regulation by various
federal, state and local authorities including the Centers for
Medicare and Medicaid Services (formerly the Health Care
Financing Administration), the U.S. Department of Health
and Human Services and state and local governments. For example,
sales, marketing and scientific and educational grant programs
must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act,
and False Claims Act and similar state laws. Pricing and rebate
programs must comply with the Medicaid rebate requirements of
the Omnibus Budget Reconciliation Act of 1990. If products are
made available to authorized users of the Federal Supply
Schedule of the General Services Administration, additional laws
and requirements apply. All of these activities are also
potentially subject to federal and state consumer protection and
unfair competition laws.
Moreover, we are now, and may become, subject to additional
federal state and local laws, regulations and policies relating
to safe working conditions, laboratory practices, and
experimental use of animals, and the use, storage, handling,
transportation and disposal of human tissue, waste and hazardous
substances, including radioactive and toxic materials and
infectious disease agents used in conjunction with our research
work.
European Union Regulatory Requirements
Our ability to market our products outside the U.S. will be
contingent upon receiving marketing authorizations from the
appropriate regulatory authorities and compliance with
applicable post-approval regulatory requirements. Although the
specific requirements and restrictions vary from country to
country, as a general matter, foreign regulatory systems include
risks similar to those associated with FDA regulation, described
above. Under the European Union regulatory systems, marketing
authorizations may be submitted either under a centralized or
decentralized procedure. Under the centralized procedure, a
single application to the European Medicines Agency, known as
the EMEA, leads to an approval granted by the European
Commission which permits the marketing of the product throughout
the European Union. We assume that the centralized procedure
will apply to our products that are developed by means of a
biotechnology process. The decentralized procedure provides for
mutual recognition of nationally approved decisions and is used
for product that do not qualify under the centralized procedure.
Under the decentralized procedure, the holders of a national
marketing authorization may submit further applications to the
competent authorities of the remaining member states, which will
then be requested to recognize the original authorization based
upon an assessment report prepared by the original authorizing
competent authority. The recognition process should take no
longer than 90 days, but if one member state made an
objection, which under the legislation can only be based on a
possible risk to human health, we have the option to withdraw
the application from that country or take the application to
arbitration by the Committee for Proprietary Medicinal Products,
known as CPMP, of the EMEA. If a referral for arbitration is
made, the procedure is suspended, and in the intervening time,
the only European Union country in which the product can be
marketed will be the country where the original authorization
has been granted, even if all the other designated countries are
ready to recognize the product. The opinion of the CPMP, which
is binding, could support or reject the objection or
alternatively could reach a compromise position acceptable to
all European Union countries concerned. Arbitration can be
avoided if the application is withdrawn in the objecting
country, but once the application has been referred to
arbitration, it cannot be withdrawn. The arbitration procedure
may take an additional year before a final decision is reached
and may require the delivery of additional data.
As with FDA approval, we may not be able to secure regulatory
approvals in Europe in a timely manner, if at all. Additionally,
as in the U.S., post-approval regulatory requirements, such as
those regarding product manufacturers, marketing or
distribution, would apply to any product that is approved in
Europe, and failure to comply with such obligations could have a
material adverse effect on our ability to successfully
commercialize any product.
There has recently been introduced in Europe new legislation
designed to harmonize the regulation of clinical trials across
the European Union, and that legislation is currently being
implemented on a country-by-country basis. In addition, new
proposals are under advanced consideration which, if brought
into law, will effect substantial and material changes in the
regulation of medicinal products in Europe. Accordingly, in
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seeking approval for our products in Europe we face a marked
degree of chance and uncertainty both in the regulation of
clinical trials and in respect of marketing authorizations.
Other Foreign Regulatory Requirements
We and our collaborative partners are subject to widely varying
foreign regulations, which may be quite different from those of
the FDA, governing clinical trials, product registration and
approval and pharmaceutical sales. Whether or not FDA approval
has been obtained, we must obtain a separate approval for a
product by the comparable regulatory authorities of foreign
countries prior to the commencement of product marketing in
these countries. In certain countries, regulatory authorities
also establish pricing and reimbursement criteria. The approval
process varies from country to country, and the time may be
longer or shorter than that required for FDA approval. In
addition, under current U.S. law, there are significant
restrictions on the export of products not approved by the FDA,
depending on the country involved and the status of the product
in that country.
Employees
As of February 28, 2005, we had approximately
79 full-time employees, consisting of 21 individuals in
management and administration, 34 individuals in sales and
marketing, 15 individuals in research and development and
manufacturing and 9 individuals in quality assurance and
control. From time to time, we also employ independent
contractors or consultants to support our clinical and
regulatory efforts. None of our employees are represented by a
collective bargaining unit and we have never experienced a work
stoppage. We believe that our relations with our employees are
good.
Litigation
We are not subject to any pending or, to our knowledge,
threatened litigation.
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MANAGEMENT
Directors and Executive Officers
The following sets forth information for each of our directors
and executive officers as of February 11, 2005.
Name
Age
Position
David S. Tierney, M.D.
41
President, Chief Executive Officer and Director
Matthew L. Rue, III
54
Vice President of Marketing and Commercial Development
Petr F. Kuzma
61
Vice President of Research and Development
Pete J. Perron
38
Vice President of Sales
James C. Gale
55
Chairman of the Board of Directors
David R. Dantzker, M.D.
61
Director
Jerome Feldman
76
Director
Hubert Huckel, M.D.
73
Director
Jeffrey M. Krauss
48
Director
Ogden R. Reid
79
Director
Howard Silverman
69
Director
John T. Spitznagel
63
Director
David S. Tierney, M.D.
is our President and Chief
Executive Officer and a member of our board of directors and has
been with us since August 2000 as an officer and since December
2001 as a director. Prior to joining us, Dr. Tierney was
president of Biovail Technologies, a division of Biovail
Corporation, a Canadian drug delivery company, from January 2000
to August 2000. Prior to Biovail, Dr. Tierney spent three
years at Roberts Pharmaceutical Corporation as senior vice
president of drug development from March 1997 to January 2000.
Prior to joining Roberts, Dr. Tierney spent eight years at
Elan Corporation, plc, a pharmaceutical company, in a variety of
management positions. Dr. Tierney currently serves as a
director on the boards of Able Laboratories, a pharmaceutical
company, and Catalyst Pharmaceutical Partners, a pharmaceutical
company. Dr. Tierney received a medical degree from the
Royal College of Surgeons in Dublin, Ireland and was
subsequently trained in internal medicine.
Matthew L. Rue, III
is currently our Vice President
of Marketing and Commercial Development and has been with us
since August 2000. Prior to joining us, Mr. Rue previously
served as director of marketing, product manager, and consultant
at Roberts Pharmaceuticals Corporation from 1996 to 2000.
Mr. Rue's expertise is in prescription marketing and
product launches and he has launched or re-launched three
prescription brands. Prior to joining Roberts, Mr. Rue
served as an account supervisor at Cline, Davis & Mann,
an advertising company, and was a senior product manager at
Reed & Carnick, a specialty pharmaceutical firm, where
he developed and launched numerous over-the-counter and
prescription pharmaceuticals. Mr. Rue received a B.F.A. in
English from Emerson College.
Petr F. Kuzma
is currently our Vice President of Research
and Development and has been with us since 1987. Mr Kuzma has
over thirty years of experience in the polymer, medical device
and pharmaceutical industries. He joined GP Strategies, our
former parent and a global provider of training, e-Learning
solutions, management consulting, engineering and simulation
services in 1975. During his tenure at GP Strategies, he held
numerous research and development positions of increasing scope
and responsibility with various divisions of GP Strategies.
Mr. Kuzma received a M.S. in chemical engineering from
Slovak University in Czechoslovakia, a B.S. in chemistry from
St. Peter's College, and a B.S. in chemical technology from
the Institute of Industrial Chemistry in Czechoslovakia.
Pete J. Perron
is currently our Vice President of Sales
and has been with us since April 2004. Prior to joining us,
Mr. Perron was at Ortho-McNeil Pharmaceutical, Inc., a
Johnson & Johnson company from July 2001 to April 2004,
where he served as product director for several brands,
including two with combined
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annual sales in excess of $500 million, and as a regional
business director responsible for overseeing several district
managers and more than 75 sales representatives. Prior to
Ortho-McNeil, Mr. Perron was product manager at
G.D. Searle/ Pharmacia from October 1999 to July 2001.
Mr. Perron received a B.A. and an M.S. in business
communications from the University of North Texas.
James C. Gale
is currently the Chairman of our board of
directors and has served as a member of our board of directors
since December 2001. Mr. Gale is the managing director of
Sanders Morris Harris, Inc., a national investment management
and investment banking company and affiliate of several
stockholders of ours, and is the managing partner of LOF
Partners, an affiliate of Sanders Morris Harris that manages
several stockholders of ours and has served in this capacity
since 1998. From 1992 to 1998, Mr. Gale was head of
investment banking at Gruntal & Co., L.L.C., a large
brokerage and investment banking company. Prior to joining
Gruntal, Mr. Gale originated and managed private equity
investments for the Home Insurance Co., Gruntal's parent,
from 1989 to 1992. Mr. Gale also serves on the board of
directors of Relm Wireless Corporation.
David R. Dantzker, M.D.
has served as a member of
our board of directors since June 2003. Dr. Dantzker has
been a general partner at Wheatley Partners, L.P., a New
York-based venture capital firm and one of our stockholders,
since January 2001. He has served on the faculty and in
leadership positions of four major research-oriented medical
schools and has authored or co-authored 130 research papers and
five textbooks. He is an internationally recognized expert in
the area of pulmonary medicine and critical care. Prior to
serving with Wheatley Partners, Dr. Dantzker served as
chief executive officer of Redox Pharmaceuticals Corporation
from November 2000 until October 2001. From January 2000 to May
2000, Dr. Dantzker was president of North Shore-LIJ Health
System, one of the largest academic health systems in the
country. Dr. Dantzker is currently chairman of the board of
directors of Versamed, Inc. and Q-RNA, Inc. and a director of
CNS, Visionsense, Ltd., and Surgical Sealants, Inc.
Jerome I. Feldman
has served as a member of our board of
directors since January 2005. Mr. Feldman is the founder of
GP Strategies Corporation, and since 1959, has served as its
chief executive officer. He has also served as chairman of the
board of directors of GP Strategies Corporation since 1999.
Mr. Feldman was president of GP Strategies from 1959 until
2001. He has been chairman of the board of directors of Five
Star Products, Inc., a wholesale distributor of home decorating,
hardware and finishing products, since 1994, a director of GSE
Systems, Inc., a global provider of real-time simulation and
training solutions, since 1994, and chairman of the board of
directors of GSE since 1997. Mr. Feldman is also chairman
of the board of directors and chief executive officer of
National Patent Development Corporation, the parent of one of
our stockholders, MXL Industries, Inc., and a holding
company with interests in optical plastics, paint and hardware
distribution and pharmaceuticals. Mr. Feldman is also
chairman of the New England Colleges Fund and a Trustee of
Northern Westchester Hospital Center.
Hubert Huckel, M.D.
has served as a member of our
board of directors since January 2002. From 1964 until his
retirement in December 1992, Dr. Huckel served in various
positions with the Hoechst Group, an agri-chemical company. At
the time of his retirement, he was chairman of the board of
Hoechst-Roussel Pharmaceuticals, Inc., chairman and president of
Hoechst-Roussel Agri-Vet Company and a member of the executive
committee of Hoechst Celanese Corporation. Dr. Huckel
currently serves as a director on the boards of Titan
Pharmaceuticals, Inc., Thermogenesis Corporation, a
biotechnology firm, Concordia Pharmaceuticals, Inc. and Catalyst
Pharmaceutical Partners.
Jeffrey M. Krauss
has served as a member of our board of
directors since August 2004. Mr. Krauss has been a managing
member of the Psilos Group, a New York-based venture capital
firm since 2000 and one of our stockholders since August 2004.
Prior to joining Psilos, Mr. Krauss spent ten years at
Nazem & Company as a general partner of three venture
capital funds from 1990 to 2000. Prior to joining Nazem,
Mr. Krauss was an attorney at the law firm of Simpson
Thacher & Bartlett LLP, where he specialized in private
equity transactions. Mr. Krauss is currently a member of
the Healthcare Sector Group of the New York City Investment
Fund. Mr. Krauss is also a certified public accountant.
Mr. Krauss currently serves as a director on the boards of
Quovadx, Inc. and Tegal Corporation.
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Ogden R. Reid
has served as a member of our board of
directors since December 2001. Mr. Reid was formerly vice
chairman of GTS Duratek, Inc. and is currently director of
General Physics Corporation. From 1953 to 1959, he was president
and executive editor of both the New York Herald Tribune Inc.
and the New York Herald Tribune S.A. As a member of the
U.S. Congress from 1961 to 1974, he served on the Foreign
Affairs, Education and Labor, and Government Operations
Committees. A candidate for Governor of New York in 1974, he
later became Commissioner of the New York State Department of
Environmental Conservation. He was also chairman of the
executive committee for the Board of MGM from 1956 to 1957.
Mr. Reid is currently chairman of the Council of American
Ambassadors.
Howard Silverman
has served as a member of our board of
directors since December 2001. Mr. Silverman is currently a
director of Getty Petroleum Corporation. From 1974 to 1995,
Mr. Silverman was chairman, president and chief executive
officer of Gruntal and Company, a large brokerage and investment
banking company. While at Gruntal, Mr. Silverman served on
numerous committees for the New York Stock Exchange.
Mr. Silverman formerly served as a director on the boards
of Getty Petroleum, Work Wear Corp., Inc., and Carteret Savings
Bank. He has also served as a trustee of Long Island University
and Chemotherapy Foundation. Mr. Silverman currently serves
as a charter member for the Financial Analysts Federation and
The New York Society of Analysts.
John T. Spitznagel
has served as a member of our board of
directors since December 2001. Mr. Spitznagel has been
chairman and chief executive officer of ESP Pharmaceuticals,
Inc. since 2002. Previously, from 1996 to 1999,
Mr. Spitznagel served as president and chief executive
officer of Roberts Pharmaceutical Corporation, a specialty
pharmaceutical firm, which merged with Shire Pharmaceuticals
Group plc in 1999. Prior to joining Roberts, Mr. Spitznagel
was president of Reed and Carnick, a specialty pharmaceutical
firm, from 1990 to 1995. Mr. Spitznagel is the chairman of
the board of directors of ESP Pharmaceuticals, Inc. and a
director of Saturn Pharmaceuticals, Barbeau Pharma, Inc. and IRX
Theapeutics, Inc. and a trustee of Rider College.
Board Composition
Upon closing of this offering, our board of directors will
consist of eight directors, each serving a one year term
expiring at the next annual meeting of stockholders. The board
will observe all criteria for independence established by The
Nasdaq National Market, or Nasdaq, and other governing laws and
regulations. No director will be deemed to be independent unless
the board affirmatively determines that the director has no
material relationship with us directly, or as an officer,
stockholder or partner of an organization that has a
relationship with us.
Board Committees
Upon the completion of this offering, the standing committees of
our board of directors will consist of the Audit Committee,
Compensation Committee and Nominating and Corporate Governance
Committee. These committees are described below. Our board of
directors may also establish various other committees to assist
it in its responsibilities.
Audit Committee
The Audit Committee is primarily concerned with the accuracy and
effectiveness of the audits of our financial statements by our
internal audit staff and by our independent auditors. Its duties
include:
•
selecting independent auditors;
•
reviewing the scope of the audit to be conducted by them and the
    results of their audit;
•
approving non-audit services provided to us by the independent
    auditor;
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•
reviewing the integrity, adequacy and effectiveness of our
    financial reporting process and internal controls; assessing our
    financial reporting practices, including the disclosures in our
    annual and quarterly reports and the accounting standards and
    principles followed; and
•
conducting other reviews relating to compliance by our employees
    with our policies and applicable laws.
Currently, the Audit Committee is comprised of
Messrs. Krauss and Reid and Dr. Huckel, each of whom
is independent as defined under Nasdaq rules. Mr. Krauss
currently serves as Chairman of the committee. The board of
directors has determined that Mr. Krauss qualifies as
"audit committee financial expert" as that term is
defined under the rules of the Securities and Exchange
Commission, or SEC.
Compensation Committee
This Compensation Committee's primary responsibility is to
discharge our board of director's responsibilities relating
to compensation of our senior executives. Its duties include:
•
developing guidelines and reviewing the compensation and
    performance of our executive officers;
•
setting the compensation of the chief executive officer and
    evaluating his performance based on corporate goals and
    objectives;
•
making recommendations to the board of directors with respect to
    incentive compensation plans, equity-based plans and deferred
    compensation plans; and
•
reviewing director compensation levels and practices, and
    recommending, from time to time, changes in such compensation
    levels and practices to the board of directors.
Currently, the Compensation Committee is comprised of
Messrs. Spitznagel and Silverman and Dr. Dantzker,
each of whom is independent as defined under Nasdaq rules.
Mr. Silverman currently serves as Chairman of the committee.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee's
responsibilities include the selection of potential candidates
for our board of directors and the development and annual review
of our governance principles. This committee also annually
reviews director compensation and benefits, and oversees the
annual self-evaluations of our board of directors and its
committees. It also makes recommendations to our board of
directors concerning the structure and membership of the other
board committees.
The Nominating and Corporate Governance Committee is comprised
of Messrs. Gale, Krauss and Feldman, each of whom is
independent as defined under Nasdaq rules. Mr. Gale
currently serves as Chairman of the committee.
Compensation Committee Interlocks and Insider
Participation
None of the members of our Compensation Committee were at any
time an officer or employee of ours. In addition, none of our
executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors
or Compensation Committee. Dr. Dantzker has voting control
over 428,571 shares of our series C convertible
preferred stock, which was purchased by Wheatley Med Tech
Partners, L.P. in 2004. Mr. Silverman invested $126,846 in
SMH Valera LLC, which purchased shares of our series C
convertible preferred stock in 2004. In addition,
Dr. Dantzker was elected a director as a representative of
Wheatley Med Tech Partners, L.P. under our second amended and
restated investor rights agreement dated August 16, 2004.
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Compensation of Directors
Our directors currently do not receive, and have not received,
any cash compensation for serving on our board, but are eligible
to receive options and restricted shares of our common stock
under the Valera Pharmaceutical Equity Incentive Plan. In 2004,
Mr. Gale and Mr. Krauss received 5,000 and 90,000
options, respectively.
Executive Compensation
The following table summarizes the compensation earned in the
year ended December 31, 2004 by our Chief Executive Officer
and the other three most highly paid executive officers whose
total salary and bonus awards exceeded $100,000 for the year
ended December 31, 2004. In this prospectus, we refer to
these individuals as our "named executive officers."
Summary Compensation Table
Long-term
Compensation
Annual Compensation
Awards
Other
Shares
Name and Principal Position
Salary
Bonus
Compensation
(1)
Underlying
Options
David S. Tierney, M.D.
$
300,000
$
75,000
$
6,500
475,000
President and Chief Executive Officer
Matthew L. Rue, III
168,000
25,000
6,324
200,000
Vice President of Marketing and
Commercial Development
Pete J.
    Perron
(2)
119,109
30,000
—
500,000
Vice President of Sales
Petr F. Kuzma
135,000
20,000
4,801
150,000
Vice President of Research and Development
(1)
Such amounts represent matching contributions under our 401(k)
    plan.
(2)
Mr. Perron joined Valera in April 2004 at an annual salary
    of $170,000.
Option Grants
The following table contains information concerning the grant of
options to purchase shares of our common stock to each of the
named executive officers during the year ended December 31,
2004. The percentage of total options granted to employees set
forth below is based on an aggregate of 2,123,000 shares
subject to options granted in 2004, including options granted to
named executive officers.
Option Grants in Last Fiscal Year
Potential Realizable
Percent of
Value at Assumed
Number of
Total
Annual Rates of Stock
Securities
Options
Fair Market
Price Appreciation for
Underlying
Granted to
Exercise or
Value on
Option Term
Options
Employees
Base Price
Date of
Expiration
Name
Granted
in 2004
($/share)
(1)
Grant
(2)
Date
5%
(3)
10%
(3)
David S. Tierney, M.D.
475,000
22
%
$
0.50
$
0.90
9/27/2014
$
$
Matthew L. Rue, III
200,000
9
%
$
0.50
$
0.90
9/27/2014
Pete J. Perron
500,000
24
%
$
0.50
$
0.90
9/27/2014
Petr F. Kuzma
150,000
7
%
$
0.50
$
0.90
9/27/2014
(1)
These options become exercisable as to 25% of the underlying
    shares upon the yearly anniversary of the date of grant.
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(2)
There was no public trading market for our common stock during
    2004. Accordingly, these prices represent the fair market value,
    as determined by our board of directors, of our common stock on
    the date of grant of the options.
(3)
Potential realizable values are computed by multiplying the
    number of shares of common stock subject to a given option by
    the assumed initial public offering price of
    $           per
    share, which is the midpoint of the range set forth on the cover
    of this prospectus, assuming that the aggregate stock value
    derived from that calculation compounds at an annual 5% or 10%
    rate shown in the table for the entire ten-year term of the
    option and subtracting from that result the aggregate option
    exercise price. The 5% and 10% assumed annual rates of stock
    appreciation are mandated by the rules of the SEC and do not
    reflect our estimate or projection of future stock price growth.
Aggregated Options Values at December 31, 2004
The following table sets forth the number and value of
securities underlying unexercised options held by the named
executive officers at December 31, 2004. Because there was
no public market for our common stock as of December 31,
2004, amounts described in the following table under the heading
"Value of Unexercised In-the-Money Options at
December 31, 2004" are determined by multiplying the
number of shares issued or issuable upon exercise of the option
by the difference between the assumed initial public offering
price of
$           per
share, which is the midpoint of the range set forth on the cover
and the per share option exercise price. In 2004, none of our
named executive officers exercised any options.
Value of Unexercised
Number of
In-the-money Options at
Unexercised Options at
December 31, 2004
December 31, 2004
($)
(1)
Name
Exercisable
Unexercisable
Exercisable
Unexercisable
David S. Tierney, M.D.
1,075,000
1,700,000
Matthew L. Rue, III
275,000
425,000
Pete J. Perron
—
500,000
Petr F. Kuzma
137,500
362,500
(1)
Based upon an assumed initial public offering price of
    $               per
    share, which is the midpoint of the range set forth on the cover
    of this prospectus.
Employment Agreements
We entered into an employment agreement with David Tierney, our
President and Chief Executive Officer, on September 16,
2003. In connection with the employment agreement,
Dr. Tierney also entered into an employee confidentiality
and non-competition agreement with us setting forth his
obligations not to compete with us or disclose confidential
information of ours. Pursuant to his employment agreement,
Dr. Tierney is required to devote his full time, attention,
skill and efforts to our business and affairs.
Dr. Tierney's current base salary, as adjusted by our
board of directors in accordance with the terms of the
agreement, is $300,000. In addition, Dr. Tierney is
eligible to participate in any annual bonus program or benefit
plans and programs adopted by our board of directors. Following
July 1, 2006, unless this employment agreement is renewed,
Dr. Tierney will become an "at-will" employee.
The employment agreement provides that we may terminate
Dr. Tierney's employment with or without cause and
that Dr. Tierney may terminate his employment with or
without good reason.
In the event of Dr. Tierney's employment is terminated
as a result of his death or permanent disability,
Dr. Tierney and/or his spouse or dependents, as applicable,
will receive 24 months in the case of death and
29 months in the case of permanent disability, of
healthcare and dental insurance continuation at our expense.
In the event Dr. Tierney's employment is terminated by
us other than for cause or if he resigns with good reason,
Dr. Tierney will receive any earned and accrued but unpaid
annual bonus and the continuation of his
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current base salary until the later of July 1, 2006 or the
last day of the 12-month period, or 18-month period, if
following a change in control, following such termination or
resignation.
For purposes of the employment agreement, "cause"
means (i) the commission by the executive of an act of
fraud, misappropriation or personal dishonesty relating to or
involving us in any way; (ii) the executive's arrest
for, conviction of, or plea of no contest to a felony, the
willful failure, neglect or refusal to perform, or gross
negligence, in the performance of duties and responsibilities;
(iii) the violation by the executive of our rules,
regulations, policies or plans regarding the conduct of our
employees, where such violation continues for 10 days
following the executive's receipt of notice from our board
of directors; or (iv) the violation of any obligations
under the employee confidentiality and non-competition agreement
or the employment agreement, where such violation continues for
10 days following the executive's receipt of notice
from our board of directors.
In addition, for purposes of the employment agreement,
"good reason" means (i) a change by us in the
executive's position that materially reduces his duties or
responsibilities (where such change continues for 10 days
following our receipt of notice from the executive); (ii) a
reduction by us in the executive's base salary (other than
pursuant to a company-wide reduction of base salaries for
executives generally); (iii) an executive's relocation
by us to a facility or location more than 50 miles from the
greater Cranbury, New Jersey area, or (iv) our failure to
perform any obligations under the employment agreement (where
such failure continues for 10 days following our receipt of
notice from the executive).
Valera Pharmaceuticals, Inc.
Equity Incentive Plan
In September 2002, we adopted our Equity Incentive Plan or
Equity Plan, which was approved by our stockholders in May 2003.
Our Equity Plan provides for the award of:
•
restricted shares of our common stock;
•
incentive stock options;
•
non-qualified stock options; or
•
any combination of the foregoing.
Grants of restricted shares and non-qualified stock options can
be made to our employees, directors, consultants, and other
individuals who perform services for us. Grants of incentive
stock options may only be made to our employees. The principal
features of our Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to our Equity
Plan, which is filed as an exhibit to the registration statement
of which this prospectus is a part.
Number of shares of our
common stock available under our Equity Plan
As of March 10, 2005, we have reserved a total of
11,000,000 shares of our common stock for issuance pursuant
to our Equity Plan. Shares subject to forfeited, cancelled, or
expired awards and shares received in satisfaction of the
exercise price of an option become available for grant again
under our Equity Plan. In addition, shares withheld in payment
of any exercise price or in satisfaction of any withholding
obligation arising in connection with an award granted under our
Equity Plan become available for grant again under our Equity
Plan. In connection with recapitalizations, stock splits,
combinations, stock dividends, and other events affecting our
common stock, the compensation committee may make adjustments or
equitable substitutions it deems appropriate in its sole
discretion to the maximum number, type and issuer of the
securities reserved for issuance under the Equity Plan, to the
maximum number, type and issuer of shares of our common stock
subject to outstanding options, to the exercise price of the
options and to the number, type and issuer of restricted shares.
Administration of our Equity
Plan
Our compensation committee administers our Equity Plan under
authority granted to it by our board of directors in accordance
with the terms of our Equity Plan. To administer our Equity
Plan, our compensation
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committee must consist of at least two members of our board of
directors, each of whom is a "non-employee director"
for purposes of Rule 16b-3 under the Securities Exchange
Act of 1934, or the Exchange Act and, with respect to awards
that are intended to constitute performance-based compensation
under Section 162(m) of the Internal Revenue Code of 1986,
an "outside director" for the purposes of
Section 162(m). Our compensation committee, among other
things, interprets our Equity Plan, selects award recipients,
determines the type of awards to be granted to such recipients
and determines the number of shares subject to each award and
the terms and conditions thereof. Our compensation committee may
also determine if or when the exercise price of an option may be
paid in the form of shares of our common stock and the extent to
which shares or other amounts payable with respect to an award
can be deferred by the participant. Our board of directors may
amend or modify our Equity Plan at any time. In addition, our
board of directors is also authorized to adopt, alter and repeal
any rules relating to the administration of our Equity Plan and
to rescind the authority of the compensation committee and
thereafter directly administer our Equity Plan. However, subject
to certain exceptions, no amendment or modification will impair
the rights and obligations of a participant with respect to an
award unless the participant consents to that amendment or
modification.
Our Equity Plan will continue in effect until terminated by us
in accordance with its terms, although incentive stock options
may not be granted more than 10 years after the adoption of
our Equity Plan.
Restricted shares under our
Equity Plan
Under the Equity Plan, we may issue restricted shares under a
restricted share agreement, the terms and conditions of which
will be set forth by our compensation committee at the time of
the grant. Restricted shares are shares of our common stock
issued to a participant that may not be sold or otherwise
transferred by the participant until certain vesting conditions
established by our compensation committee, in its discretion, at
the time of grant (such as a specified period of continued
employment or the fulfillment of specified individual or
corporate performance goals) are met or until such time as set
by our compensation committee. Holders of the restricted shares
will not have voting rights with respect to such restricted
shares until the lapse of the transfer restrictions described
above. If a participant's service with us terminates prior
to the end of the transfer restrictions, all of that
participant's restricted shares which have not vested will
be forfeited. Restricted shares may be sold under our Equity
Plan (at its full value or at a discount) or may be granted
solely in consideration for services.
Upon or in anticipation of a change in control, our compensation
committee may, in its discretion:
•
cause restrictions on all outstanding shares of restricted stock
    to lapse;
•
cancel restricted stock in exchange for shares of restricted
    stock of a successor corporation; or
•
redeem restricted shares for cash or other substitute
    consideration.
Stock options under our
Equity Plan
Our Equity Plan permits the grant of incentive stock options and
non-qualified stock options. The exercise price of any incentive
stock options granted under our Equity Plan may not be less than
100% of the fair market value of our common stock on the date of
grant. In the case of any incentive stock option granted to a
participant who owns at least 10% of the total combined voting
power of all classes of our capital stock, our Equity Plan
provides that the exercise price must be at least 110% of the
fair market value of our common stock on the date of the grant
and the incentive stock option must expire on the fifth
anniversary of the date of the grant. In addition, the aggregate
fair market value of shares of our common stock into which
incentive stock options are exercisable, for the first time by a
participant, in any calendar year may not exceed $100,000.
Options granted under our Equity Plan may be exercised for cash
and/or in exchange for previously acquired shares of our common
stock owned by the option holder having a combined value on the
date of exercise equal to the option exercise price.
Under our Equity Plan, each option will vest and be exercisable
at such time and to such extent as specified in the pertinent
option agreement between us and the option recipient. However,
no award will be exercisable with respect to any shares of our
common stock more than 10 years after the date of such
award.
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Unless otherwise specified by our compensation committee with
respect to a particular option, all options are
non-transferable, except upon death. If a participant's
service with us terminates due to death or disability, any
options held by the participant may be exercised until
(i) such time specified by the compensation committee,
(ii) if not specified by the compensation committee,
12 months from termination of service, or (iii) if
earlier than the foregoing, the expiration for the stated term
of the option. If a participant's service with us is
terminated for cause, any unexercised options will be
automatically forfeited, and any shares of our common stock into
which options are exercisable but for which certificates have
not been issued, will be automatically forfeited and any
exercise price paid for such shares will be refunded. In
addition, if a participant's service with us is terminated
for any other reason, any option held by the participant may be
exercised until (i) such time specified by the compensation
committee, (ii) if not specified by the compensation
committee, 90 days from termination of service, or
(ii) if earlier than the foregoing, the expiration of the
stated term of the option.
Upon our change in control, our compensation committee may:
•
cause outstanding options to become immediately and fully vested
    and exercisable;
•
require that the grantees surrender their outstanding options in
    exchange for a payment by us of an amount equal to the amount by
    which the fair market value of the shares of stock subject to
    the option exceeds the option exercise price; or
•
cancel any outstanding option in exchange for an option to
    purchase common stock of any successor corporation.
401(k) plan
We maintain a retirement plan for all employees who satisfy
certain eligibility requirements, including requirements,
including requirements relating to age and length of service.
The retirement plan is intended to qualify as a tax-qualified
plan under Section 401 of the Internal Revenue Code. The
retirement plan provides that each participant may contribute up
to, up to a statutory limit, which for most employees is $14,000
in 2005. Under the plan, each employee is fully vested in his or
her deferred salary contributions. Employee contributions are
held and invested by the plan's trustee at the direction of
the employee. The retirement plan also permits us to make
discretionary contributions and matching contributions, subject
to established limits and vesting schedule. To date, we have not
made any discretionary contributions to the retirement and
deferred savings plan on behalf of participating employees.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock as of December 31,
2004, before and after this offering, for the following
individuals, entities or groups:
•
each person or entity who we know beneficially owns more than 5%
    of our outstanding common stock;
•
each of the named executive officers;
•
each of our directors; and
•
all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect
to the shares. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by
that person that are currently exercisable or will become
exercisable within 60 days of December 31, 2004 are
deemed outstanding and are included in the number of shares
beneficially owned and are also are shown separately in the
column below entitled "Options Exercisable within
60 Days of December 31, 2004", while the shares
are not deemed outstanding for purposes of computing percentage
ownership of any other person. Except as otherwise indicated,
and subject to applicable community property laws, the persons
named in the table have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the following table is based
on 61,515,582 shares of common stock outstanding as of
December 31, 2004
and           shares
of common stock immediately following the completion of this
offering. Unless otherwise indicated, the address for each
stockholder listed in the table is c/o Valera
Pharmaceuticals, Inc., 8 Clarke Drive, Cranbury, New Jersey
08512.
Percentage of
Shares
Outstanding
Options Exercisable
Number of Shares
within 60 Days of
Before
After
Name
Beneficially Owned
December 31, 2004
Offering
Offering
Five Percent Stockholders
:
Sanders Morris Harris,
    Inc.
(1)
30,090,559
11,249
48.91
%
%
MXL Industries,
    Inc.
(2)
12,176,064
—
19.79
%
%
Wheatley
    Partners
(3)
7,101,582
—
11.54
%
%
Psilos
    Group
(4)
4,091,793
—
6.65
%
%
NJTC Venture
    Fund
(5)
3,323,123
—
5.40
%
%
Directors and Named Executive Officers
:
David S. Tierney, M.D.
1,075,000
1,075,000
1.72
%
%
Matthew L. Rue, III
275,000
275,000
*
%
Petr F. Kuzma
137,500
137,500
*
%
Pete J. Perron
—
—
*
%
James C.
    Gale
(6)
30,098,059
7,500
48.91
%
%
David R.
    Dantzker, M.D.
(7)
3,315,668
22,500
5.39
%
%
Jerome I.
    Feldman
(8)
12,187,314
11,250
19.81
%
%
Hubert Huckel, M.D.
83,750
83,750
*
%
Jeffrey M.
    Krauss
(9)
4,091,793
—
6.65
%
Ogden R. Reid
131,714
131,714
*
%
Howard Silverman
22,500
22,500
*
%
John T. Spitznagel
83,750
83,750
*
%
All Directors and Executive Officers as a group
51,502,048
1,850,464
81.28
%
%
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*
Less than 1%.
(1)
Represents shares held by SMH Hydro Med, LLC, SMH Hydro
    Med II, LLC, SMH Valera, LLC, Corporate Opportunities Fund,
    L.P., by Corporate Opportunities Fund (Institutional), L.P.,
    Life Sciences Opportunities Fund, L.P., Life Sciences
    Opportunities Fund (Institutional), L.P., each an affiliate of
    Sanders Morris Harris, Inc. The address for Sanders Morris
    Harris, Inc. is 3100 JP Morgan Chase Tower,
    600 Travis, Suite 3100, Houston, TX 77002.
(2)
Mr. Feldman is the chairman of the board of directors and
    chief executive officer of National Patent Development
    Corporation, the parent of MXL Industries, Inc. The address for
    MXL Industries, Inc. is 777 Westchester Avenue, Fourth
    Floor, White Plains, NY 10604.
(3)
Represents shares held by Wheatley Med Tech Partners, LP,
    Wheatley Partners III, LP, Wheatley Associates III, LP,
    Wheatley Foreign Partners III, LP, each an affiliate of
    Wheatley Partners. The address for Wheatley Partners is
    825 Third Avenue, 32nd Floor, New York, NY 10022.
(4)
Represents shares held by Psilos Group Partners II SBIC,
    L.P., an affiliate of Psilos Group. The address for Psilos Group
    is 625 Avenue of the Americas, 4th Floor, New York, NY
    10011.
(5)
Represents shares held by NJTC Venture Fund SBIC, L.P., an
    affiliate of NJTC Venture Fund. The address for NJTC Venture
    Fund is 4 Becker Farm Rd., Roseland, NJ 07068.
(6)
Includes 30,090,559 shares held by SMH described in
    footnote 1 above. Mr. Gale is an affiliate of SMH and
    manages the funds described in footnote 1 above.
    Mr. Gale disclaims beneficial ownership of the
    30,090,559 shares held by SMH except to the extent of his
    pecuniary interest in the funds described in footnote 1
    above.
(7)
Includes 3,293,168 shares held by Wheatley Medtech
    Partners, L.P. described in footnote 3 above.
    Dr. Dantzker is a voting member of Wheatley Medtech
    Partners LLC, the general partner of Wheatley Medtech Partners,
    L.P. Dr. Dantzker disclaims beneficial ownership of the
    3,293,168 shares held by Wheatley Medtech Partners, L.P.
    except to the extent of his pecuniary interest in that fund.
(8)
Mr. Feldman is the chairman of the board of directors and
    chief executive officer of National Patent Development
    Corporation, the parent of MXL Industries, Inc. Mr. Feldman
    disclaims beneficial ownership of the 12,176,064 shares
    held by MXL Industries, Inc.
(9)
Represents 4,091,793 shares held by Psilos Group described
    in footnote 4 above. Mr. Krauss is a managing director
    of Psilos Group. Mr. Krauss disclaims beneficial ownership
    of the 4,091,793 shares held by Psilos Group, except to the
    extent of his pecuniary interest in the fund described in
    footnote 4 above.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into certain agreements or transactions with
certain officers, directors and 5% stockholders. These
agreements or transactions are each summarized below. The
following description is only a summary of what we believe are
the material provisions of the agreements.
Loan from Our President and Chief Executive Officer
We issued a promissory note to our President and Chief Executive
Officer, David S. Tierney, M.D. for the aggregate principal
amount of $200,000 on June 23, 2004. The note bore interest
at the UBS Margin Interest Rate charged to Dr. Tierney plus
1.0% and was due and immediately payable upon our receipt of at
least $1,000,000 in other debt or subscriptions to purchase
shares of our series B or series C convertible
preferred stock. We satisfied our obligations under this note on
November 3, 2004.
Preferred Stock Issuances
In 2004, we sold 11,600,000 shares of our series C
convertible preferred stock at a price of $1.00 per share
to the following holders of more than 5% of our securities and
their affiliated entities: Sanders Morris Harris,
Inc. — 4,500,000; Wheatley Partners —
1,000,000; Psilos Group — 4,000,000; and NJTC Venture
Fund — 1,000,000. James C. Gale, a director, has
voting control over all of the shares of series C
convertible preferred stock purchased by Sanders Morris Harris,
Inc., David R. Dantzker, a director, has voting control over
428,571 shares of series C preferred stock, purchased
by Wheatley Med Tech Partners, L.P., Howard Silverman, a
director, invested $126,846, and David S. Tierney, M.D., our
President and Chief Executive Officer, invested $50,000 in SMH
Valera LLC, an affiliate of Sanders Morris Harris Inc.
Appointment of Directors
Pursuant to our second amended and restated investor rights
agreement dated August 16, 2004, the following persons were
elected to our board of directors: James C. Gale as
representative of the Corporate Opportunities Fund, L.P., David
R. Dantzker, M.D. as representative of Wheatley MedTech Partners
L.P., Jeffrey M. Krauss as representative of Psilos Group
Managers, LLC, and Jerome Feldman as representative of
MXL Industries, Inc. The rights to appoint directors under
the investor rights agreement will terminate upon the effective
date of the registration statement pertaining to this offering.
However, Messrs. Gale, Feldman and Krauss, and Dr. Dantzker
have each agreed to serve as a director for a term of one year
until the next annual meeting of stockholders and until his
respective successor is duly elected and qualified.
The purchasers of our preferred stock are entitled to certain
registration rights under the investor rights agreement. See
"Description of Capital Stock — Registration
Rights."
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DESCRIPTION OF CAPITAL STOCK
The description below of our capital stock and provisions of
our amended and restated certificate of incorporation and
amended and restated bylaws are summaries and are qualified by
reference to the amended and restated certificate of
incorporation and the amended and restated bylaws that will
become effective upon closing of this offering. These documents
will be filed as exhibits to the registration statement of which
this prospectus is a part. The descriptions of the common stock
and preferred stock reflect changes to our capital structure
that will occur upon the closing of this offering.
Upon the closing of this offering, our authorized capital stock
will consist
of                      shares
of common stock, par value $0.001 per share,
and                      shares
of preferred stock, par value $0.001 per share. As of
December 31, 2004, there were 61,515,582 shares of
common stock outstanding after giving effect to the automatic
conversion of all of our outstanding preferred stock into
51,515,582 shares of common stock. As of December 31,
2004, we had approximately one record holder of our common
stock and approximately 18 record holders of our
convertible preferred stock. All of our outstanding shares of
preferred stock will automatically convert into shares of common
stock immediately prior to the closing of this offering. After
the closing of this offering, we will
have                      shares
of common stock and no shares of preferred stock outstanding. In
addition, as of December 31, 2004, 7,850,000 shares of
our common stock were reserved for grants under our Equity
Incentive Plan and options to purchase 6,716,550 shares of
our common stock were outstanding.
Common Stock
Holders of shares of our common stock are entitled to one vote
for each share held of record on all matters to be voted on by
stockholders. There is no cumulative voting with respect to the
election of directors. The holders of our common stock are
entitled to receive dividends when, as and if declared by the
board of directors out of funds legally available therefore
subject to the rights of any class of stock having a preference
as to dividends.
In the event of a liquidation, dissolution or winding up of us,
the holders of our common stock are entitled to share ratably in
all assets remaining available for distribution to them after
payment of liabilities and after provision has been made for
each class of stock, if any, having preference over the common
stock. Holders of common stock have no conversion, preemptive or
other subscription rights, and there are no redemption
provisions applicable to the common stock. The rights,
preferences and privileges of holders of common stock are
subject to and may be affected by, the rights of the holders of
any shares of preferred stock that we may designate and issue in
the future.
Preferred Stock
Our certificate of incorporation also authorizes the issuance
of                 shares
of preferred stock with such designations, rights and
preferences as may be determined from time to time by our board
of directors. Our board of directors can also increase or
decrease the number of shares of any series of our preferred
stock, but not below the number of shares of that series then
outstanding, without any further vote or action by our
stockholders. Our board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of our common
stockholders. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying or
preventing our change in control and may cause the market price
of our common stock to decline or impair the voting and other
rights of the holders of our common stock. We have no current
plans to issue any shares of preferred stock.
Registration Rights
In August 2004, concurrently with the sale of our series C
convertible preferred stock, we entered into a second amended
and restated investor rights agreement with the existing holders
of all of our convertible preferred stock and common stock.
Under the agreement, if, at any time after the earlier of
(a) six months following a qualified offering, and
(b) December 31, 2005, the holders of at least 50% of
the outstanding
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common stock issued or issuable upon conversion of the
series A, series B, and series C convertible
preferred stock request that we file a registration statement
relating to the sale of our securities held by such holders, we
will use our commercially reasonable best efforts to cause such
shares to be registered, subject to certain limitations. We
believe this offering will be a "qualified offering."
We are not obligated to affect more than two registrations under
this demand provision. In the case of an underwritten offering,
these demand registration rights are subject to customary
cutbacks.
In addition, if available for our use, the holders of at least
50% of our common stock, including shares held by MXL Industries
and shares, issued or issuable upon conversion of the
series A, series B, and series C convertible
preferred stock may request that we file a registration
statement on Form S-2 or S-3 or other similar short-form
registration statement, subject to customary cutbacks in the
case of an underwritten offering. S-2 and S-3 registration
rights will not available if, among other things, the covered
securities are proposed to be sold to the public at an aggregate
offering price of less than $3,000,000 or if we have filed a
registration statement pursuant to such rights within the
preceding six months.
In addition to the demand registration rights, if we register
any of our securities under the Securities Act, the holders of
our common stock, including shares held by MXL Industries and
shares issued or issuable upon conversion of our series A,
series B, and series C convertible preferred stock,
may require that we include some or all of such shares in that
registration, subject to customary cutbacks in the case of an
underwritten offering.
We are obligated to pay all of the expenses incurred in
connection with any registration under the agreement (exclusive
of underwriting discounts and commissions with respect to any
selling stockholder's shares).
The Holders of our series A, series B, and
series C convertible preferred stock and common stock have
agreed to not sell or otherwise transfer or dispose of any
shares (excluding shares acquired in or following our initial
public offering) for such period of time as required by the
underwriters, in connection with our initial public offering,
not to exceed 180 days following the effective date of the
registration statement.
Our obligations to register shares of our common stock under the
agreement terminate with respect to any holder when all of the
shares of common stock held by such holder that were entitled to
be registered under the agreement may be sold under
Rule 144 of the Securities Act during any 90-day period.
Anti-takeover Effects of Provisions of Our Amended and
Restated Certificate of Incorporation and Bylaws and Certain
Provisions of the Delaware General Corporation Law
Certain provisions of our certificate of incorporation and
bylaws that will be in effect upon completion of this offering,
as summarized below, and applicable provisions of the Delaware
General Corporation Law (the "DGCL") may make it more
difficult for or prevent a third party from acquiring control of
us or changing our board of directors and management. These
provisions may have the effect of deterring hostile takeovers or
delaying changes in our control or in our management. These
provisions are intended to enhance the likelihood of continued
stability in the composition of our board of directors and in
the policies furnished by them and to discourage certain types
of transactions that may involve an actual or threatened change
in our control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The
provisions also are intended to discourage certain tactics that
may be used in proxy fights. However, these provisions could
have the effect of discouraging others from making tender offers
for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result
from actual or rumored takeover attempts. Such provisions may
also have the effect of preventing changes in our management.
Election and removal of directors
Directors are elected at the annual meetings of stockholders by
a plurality of the votes entitled to vote in the election of
directors and hold office until the next annual meeting of
stockholders and until their successors are duly elected and
qualified, or until their death, resignation or removal.
Directors may be removed without cause by the vote of shares
representing a      % of the votes
entitled to be cast by the outstanding capital stock in the
election of our board of directors. Directors may be removed for
cause by the vote a majority of the shares represented, in
person or by proxy, at a meeting and entitled to vote.
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No cumulative voting
Our certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. The combination
of ownership by a few stockholders of a significant portion of
our issued and outstanding common stock and lack of cumulative
voting will make it more difficult for our other stockholders to
replace our board of directors or for another party to obtain
control of us by replacing our board of directors.
Size of board and vacancies
Our certificate of incorporation provides that the number of
directors on our board of directors will be fixed exclusively by
our board of directors. Newly created directorships resulting
from any increase in our authorized number of directors will be
filled solely by the vote of our remaining directors in office.
Any vacancies in our board of directors resulting from death,
resignation or removal from office or other cause will be filled
solely by the vote of our remaining directors in office.
Stockholder action by written consent
Our certificate of incorporation provides that our stockholders
may not act by written consent without a meeting.
Stockholder meetings
Our certificate of incorporation and bylaws provide that a
special meeting of our stockholders may be called only by the
chairman of our board of directors, our president, secretary,
any two or more directors, or upon the written request of
stockholders who together own of record a majority of the
outstanding stock of all classes entitled to vote, may call
special meetings of our stockholders.
Requirements for advance notification of stockholder
    nominations and proposals
Our bylaws establish advance notice procedures with respect to
stockholder proposals and nomination of candidates for election
as directors other than nominations made by or at the direction
of our board of directors or a committee of our board of
directors.
Undesignated preferred stock
The authorization of our undesignated preferred stock makes it
possible for our board of directors to issue our preferred stock
with voting or other rights or preferences that could impede the
success of any attempt to change control of us.
Section 203 of the General Corporation Law of the
    State of Delaware
Our certificate of incorporation provides that we are not
governed by Section 203 of the DGCL. This provision would
generally prohibit a Delaware corporation from engaging in any
business combination with any interested stockholder for a
period of three years following the date that such stockholder
became an interested stockholder.
Transfer Agent and Registrar
Our transfer agent and Registrar
is                     .
Their address
is                     and
their telephone number
is                     .
The Nasdaq National Market
We have applied to have our common stock approved for quotation
on The Nasdaq National Market under the symbol "VLRX."
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SHARES ELIGIBLE FOR FUTURE SALE
General
Upon completion of this offering, there will
be                     shares
of our common stock outstanding. Of the shares which will be
outstanding after the offering:
•
all                      shares
    of common stock sold in the offering will be freely tradeable;
•
shares
    will be "restricted securities" held by
    non-affiliates; and
•
shares
    will be held
    by                     .
The restricted securities described above are eligible for sale
in the public market, subject to volume limitations, manner of
sale provisions and other requirements of Rule 144, from
time to time.
Rule 144
In general, under Rule 144 as currently in effect, a person
who has beneficially owned "restricted securities" for
at least one year, including an affiliate, is entitled to sell,
within any three-month period, a number of shares that does not
exceed the greater of:
•
one percent of the then outstanding shares of our common stock
    (approximately                      shares
    immediately following the offering); or
•
the average weekly trading volume during the four calendar weeks
    preceding filing of notice of such sale.
A person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of ours at any time during the
90 days preceding a sale and who owns shares that were
acquired from us or an affiliate of ours for at least two years
prior to the proposed sale is entitled to sell such shares
pursuant to Rule 144(k) without regard to the volume
limitations, manner of sale provisions or other limitations of
Rule 144.
Shares held
by                     may
be sold in the public market, subject to the volume, manner of
sale and other limitations of Rule 144, but may not be sold
in reliance upon Rule 144(k).
Lock-up Agreements
In addition to the limits placed on the sale of shares of our
common stock by operation of Rule 144 and other provisions
of the Securities Act of 1933, as amended, we, our directors and
executive officers and holders
of      % of our common stock (assuming
conversion of all of our shares of preferred stock immediately
prior to the completion of this offering), have entered into
lock-up agreements with the underwriters. Under these
agreements, subject to exceptions, we may not issue any new
shares of common stock, and those holders of stock may not,
directly or indirectly, offer, sell, contract to sell, pledge or
otherwise dispose of or hedge any common stock or securities
convertible into or exchangeable for shares of common stock, or
publicly announce the intention to do any of the foregoing,
without the prior written consent of UBC Securities LLC and Banc
of America Securities LLC for a period of 180 days from the
date of this prospectus. This consent may be given at any time
without public notice. If we issue an earnings release or
material news or a material event relating to us occurs during
the 15 calendar days plus 3 business days before the
last day of the lock-up period, or if prior to the expiration of
the lock-up period, we announce that we will release earnings
results during the 16 days following the last day of the
lock-up period, the restrictions provided in the lock-up
agreements will continue to apply until 18 days after the
issuance of the earnings release or the occurrence of material
news or a material event. Also, during this 180-day period, we
have agreed not to file any registration statement for, and each
of our officers and stockholders has agreed not to make any
demand for, or exercise any right of, the registration of, any
shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior
written consent of UBS Securities LLC and Banc of America LLC.
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Registration Rights
Pursuant to a second amended and restated investor rights
agreement with investors of our preferred stock, the holders of
approximately                      shares
of our common stock to be issued upon conversion of their
preferred stock, will be entitled to customary demand and
piggyback registration rights which will require us to register
these shares under the Securities Act upon the occurrence of
certain events, including the earlier of six months following a
qualified offering and December 31, 2005 and the
registration of any shares of our common stock, either for our
own account or the account of another person. These stockholders
have agreed to not sell, transfer, make any short sale of, grant
any option for the purchase of, or enter into any hedging or
similar transaction for a period of 180 days following the
effective date of the registration statement covering this
offering. See "Description of Capital Stock —
Registration Rights" for a more complete description of the
agreement.
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UNDERWRITING
We are offering the shares of our common stock described in this
prospectus through the underwriters named below. UBS Securities
LLC and Banc of America Securities LLC are the representatives
of the underwriters. We have entered into an underwriting
agreement with the representatives. Subject to the terms and
conditions of the underwriting agreement, each of the
underwriters has severally agreed to purchase the number of
shares of common stock listed next to its name in the following
table:
Number
Underwriter
of Shares
UBS Securities LLC
Banc of America Securities LLC
First Albany Capital Inc.
Fortis Securities LLC
Total
The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters' over-allotment option
described below.
Our common stock is offered subject to a number of conditions,
including:
•
receipt and acceptance of our common stock by the
    underwriters; and
•
the underwriters' right to reject orders in whole or in
    part.
We have been advised by the representatives that the
underwriters intend to make a market in our common stock but
that they are not obligated to do so and may discontinue making
a market at any time without notice.
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
Sales of shares made outside of the U.S. may be made by
affiliates of the underwriters.
Over-allotment Option
We have granted the underwriters an option to buy up
to                      additional
shares of our common stock. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with this offering. The underwriters
have 30 days from the date of this prospectus to exercise
this option. If the underwriters exercise this option, they will
each purchase additional shares approximately in proportion to
the amounts specified in the table above.
Commissions and Discounts
Shares sold by the underwriters to the public will initially be
offered at the initial offering price set forth on the cover of
this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$           per
share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the
underwriters to other brokers or dealers at a discount of up to
$           per
share from the initial public offering price. If all the shares
are not sold at the initial public offering price, the
representatives may change the offering price and the other
selling terms. Upon execution of the underwriting agreement, the
underwriters will be obligated to purchase the shares at the
prices and upon the terms stated therein and, as a result, will
thereafter bear any risk associated with changing the offering
price to the public or other selling terms. The underwriters
have informed us that they do not expect discretionary sales to
exceed      % of the shares of common
stock to be offered.
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The following table shows the per share and total underwriting
discounts and commissions we will pay to the underwriters
assuming both no exercise and full exercise of the
underwriters' option to purchase up to an additional shares.
No
Full
Exercise
Exercise
Per share
$
$
Total
$
$
We estimate that the total expenses of the offering payable by
us, excluding underwriting discounts and commissions, will be
approximately
$                    .
No Sales of Similar Securities
We, our executive officers and directors and our existing
stockholders holding an aggregate of
over      % of our shares outstanding
(including securities convertible into or exchangeable or
exercisable for our common stock) have entered into lock-up
agreements with the underwriters. Under these agreements,
subject to certain exceptions, we and each of these persons may
not, without the prior written approval of UBS Securities LLC
and Banc of America Securities LLC, offer, sell, contract to
sell or otherwise dispose of, directly or indirectly, or hedge
our common stock or securities convertible into or exchangeable
or exercisable for our common stock. These restrictions will be
in effect for a period of 180 days after the date of this
prospectus. If we issue an earnings release or material news or
a material event relating to us occurs during the 15 calendar
days plus 3 business days before the last day of the lock-up
period, or if prior to the expiration of the lock-up period, we
announce that we will release earnings results during the
16 days following the last day of the lock-up period, the
restrictions provided in the lock-up agreements will continue to
apply until 18 days after the issuance of the earnings
release or the occurrence of material news or a material event.
At any time and without public notice, UBS Securities LLC and
Banc of America Securities LLC may in their sole discretion
release all or some of the securities from these lock-up
agreements.
Indemnification
We have agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities
Act. If we are unable to provide this indemnification, we have
agreed to contribute to payments the underwriters may be
required to make in respect of those liabilities.
Nasdaq National Market Quotation
We have applied to have our common stock approved for quotation
on The Nasdaq National Market under the symbol "VLRX."
Price Stabilization, Short Positions
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including
•
stabilizing transactions;
•
short sales;
•
purchases to cover positions created by short sales;
•
imposition of penalty bids; and
•
syndicate covering transactions.
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common stock while this offering is in progress.
These transactions may also include making short sales of our
common stock, which involve the sale by the underwriters of a
greater number of shares of common stock than they are required
to purchase in this offering and purchasing shares of
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common stock on the open market to cover positions created by
short sales. Short sales may be "covered short sales,"
which are short positions in an amount not greater than the
underwriters' over-allotment option referred to above, or
may be "naked short sales," which are short positions
in excess of that amount.
The underwriters may close out any covered short position either
by exercising their over-allotment option, in whole or in part,
or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase
shares through the over-allotment option.
Naked short sales are sales in excess of the over-allotment
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
stock in the open market that could adversely affect investors
who purchased in this offering.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of that underwriter in stabilizing or short covering
transactions.
As a result of these activities, the price of our common stock
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on The Nasdaq National Market,
in the over-the-counter market or otherwise.
Determination of Offering Price
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiation by us and the representatives of the
underwriters. The principal factors to be considered in
determining the initial public offering price include:
•
the information set forth in this prospectus and otherwise
    available to the representatives;
•
our history and prospects, and the history of and prospects for
    the industry in which we compete;
•
our past and present financial performance and an assessment of
    our management;
•
our prospects for future earnings and the present state of our
    development;
•
the general condition of the securities markets at the time of
    this offering;
•
the recent market prices of, and the demand for, publicly traded
    common stock of generally comparable companies; and
•
other factors deemed relevant by the underwriters and us.
Directed Share Program
At our request, certain of the underwriters have reserved up
to      % of the common stock being
offered by this prospectus for sale at the initial public
offering price to our directors, officers, employees and other
individuals associated with us and members of their families.
The sales will be made by UBS Financial Services Inc., a
selected dealer affiliated with UBS Securities LLC, through a
directed share program. We do not know if these persons will
choose to purchase all or any portion of these reserved shares,
but any purchases they do make will reduce the number of shares
available to the general public. Certain employees and other
persons purchasing these reserved shares will be prohibited from
disposing of or hedging the shares for a period of at least
180 days after the date of this prospectus.
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AFFILIATIONS
Certain of the underwriters and their affiliates may from time
to time provide certain commercial banking, financial advising,
investment banking and other services for us for which they will
be entitled to receive a separate fee.
LEGAL MATTERS
The validity of the securities being offered will passed upon
for us by Pepper Hamilton LLP. Certain legal matters will be
passed upon for the underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP.
EXPERTS
Our financial statements at December 31, 2003 and 2004, and
for each of the three years in the period ended
December 31, 2004, appearing in this prospectus and
registration statement have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on
Form S-1 with respect to the common stock offered hereby.
This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in
the registration statement or the exhibits and schedules which
are part of the registration statement. For further information
with respect to us and our common stock and the attached rights,
reference is made to the registration statement and the exhibits
and schedules thereto. You may read and copy any document we
file, including the registration statement and any periodic
reports, proxy statements and other information, at the
SEC's public reference room at 450 Fifth Street, N.W.,
Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the public reference room. These SEC
filings are also available to the public from the SEC's
website at http://www.sec.gov.
Upon completion of the offering, we will become subject to the
information and periodic reporting requirements of the
Securities Exchange Act of 1934 and, in accordance therewith,
will file periodic reports, proxy statements and other
information with the SEC.
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INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public
    Accounting Firm
F-1
Balance Sheets as of December 31, 2003
    and 2004
F-2
Statements of Operations for the years
    ended December 31, 2002, 2003 and 2004
F-3
Statements of Shareholders' Deficit
    for the years ended December 31, 2002, 2003 and 2004
F-4
Statements of Cash Flows for the years
    ended December 31, 2002, 2003 and 2004
F-5
Notes to Financial Statements
F-6
Financial Statement Schedule
F-20
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VALERA PHARMACEUTICALS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Valera Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Valera
Pharmaceuticals, Inc. as of December 31, 2003 and 2004, and
the related statements of operations, shareholders'
deficit, and cash flows for each of the three years in the
period ended December 31, 2004. Our audits also included
the financial statement schedule listed in Item 16(b) and
the Index to Financial Statements of Form S-1 of this
Registration Statement. These financial statements and schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Valera Pharmaceuticals, Inc. at December 31, 2003 and
2004 and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting
principles. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As described in Note 2 to the financial statements, the
Company has restated its 2003 financial statements to reflect a
deemed dividend on its Series A preferred stock which was
not previously recorded.
/s/ Ernst & Young LLP
March 10, 2005
MetroPark, New Jersey
F-1
Table of Contents
VALERA PHARMACEUTICALS, INC.
BALANCE SHEETS
December 31,
Pro Forma at
December 31,
2003
2004
2004
(Restated)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
5,241,246
$
5,052,643
$
5,052,643
Accounts receivable, net of allowance of $435,025 at
    December 31, 2004
—
4,914,576
4,914,576
Other accounts receivable
573,500
—
—
Inventories
—
1,365,018
1,365,018
Prepaid and other current assets
91,467
141,651
141,651
Restricted cash
—
100,000
100,000
Total current assets
5,906,213
11,573,888
11,573,888
Fixed assets, net
351,422
1,704,305
1,704,305
Security deposits
406,915
45,000
45,000
Total assets
$
6,664,550
$
13,323,193
$
13,323,193
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable
$
1,185,298
$
2,041,393
$
2,041,393
Accrued liabilities
101,383
1,208,298
1,208,298
Current portion of capital lease obligations
34,044
17,873
17,873
1,320,725
3,267,564
3,267,564
Capital lease obligations
32,709
17,193
17,193
Series A 6% Cumulative Convertible Preferred Stock,
    $0.001 par value; 7,000,000 shares authorized,
    7,000,000 shares issued and outstanding at
    December 31, 2003 and 2004; liquidation
    preference — $7,160,638 at December 31, 2004
7,743,391
13,603,856
—
Series B 10% Cumulative Convertible Preferred Stock,
    $0.001 par value; 24,500,000 shares authorized,
    18,620,690 and 22,068,966 shares issued and outstanding at
    December 31, 2003 and 2004 respectively; liquidation
    preference — $18,362,875 at December 31, 2004
12,726,055
15,082,305
—
Series C 6% Convertible Preferred Stock,
    $0.001 par value; 11,600,000 shares authorized,
    11,600,000 shares issued and outstanding at
    December 31, 2004; liquidation preference —
    $11,866,201 at December 31, 2004
—
11,238,834
—
Shareholders' (deficit) equity:
Common stock, $.001 par value; 75,000,000 shares
    authorized, 10,000,000 shares issued and outstanding at
    December 31, 2003 and 2004, respectively;
    61,515,582 shares issued and outstanding pro forma
    (unaudited)
10,000
10,000
61,516
Additional paid-in capital
5,265,267
9,953,323
49,826,802
Deferred stock-based compensation
—
(1,532,766
)
(1,532,766
)
Accumulated deficit
(20,433,597
)
(38,317,116
)
(38,317,116
)
Total shareholders' (deficit) equity
(15,158,330
)
(29,886,559
)
10,038,436
Total liabilities and shareholders' (deficit) equity
$
6,664,550
$
13,323,193
$
13,323,193
See accompanying notes.
F-2
Table of Contents
VALERA PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
Year Ended December 31,
2002
2003
2004
(Restated)
Net product sales
$
15,006
$
7,353
$
5,511,286
Licensing revenue
—
—
134,636
Total net revenue
15,006
7,353
5,645,922
Operating costs and expenses:
Cost of product sales
—
—
608,150
Research and development
4,319,709
5,229,529
6,375,819
Selling and marketing
269,633
509,514
5,025,038
General and administrative
1,324,378
1,838,101
5,897,435
Total operating expenses
5,913,720
7,577,144
17,906,442
Loss from operations
(5,898,714
)
(7,569,791
)
(12,260,520
)
Interest income
44,358
26,609
64,719
Interest expense
(28,439
)
(13,475
)
(70,871
)
Loss before income taxes
(5,882,795
)
(7,556,657
)
(12,266,672
)
Benefit for income taxes
—
—
(243,618
)
Net loss
(5,882,795
)
(7,556,657
)
(12,023,054
)
Deemed dividend
—
(1,139,535
)
(5,860,465
)
Net loss attributable to common shareholders
$
(5,882,795
)
$
(8,696,192
)
$
(17,883,519
)
Basic and diluted net loss attributable to common shareholders
    per share
$
(0.59
)
$
(0.87
)
$
(1.79
)
Weighted average shares outstanding — basic and diluted
10,000,000
10,000,000
10,000,000
Unaudited pro forma basic and diluted net loss attributable to
    common shareholders per share
$
(0.40
)
Unaudited pro forma weighted average shares
    outstanding — basic and diluted
44,206,980
See accompanying notes.
F-3
Table of Contents
VALERA PHARMACEUTICALS, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
For the Years Ended December 31, 2002, 2003 and 2004
Common Stock
Additional
Total
Par
Paid-in
Deferred
Accumulated
Shareholders'
Shares
Value
Capital
Compensation
Deficit
Deficit
Balance at December 31, 2001
10,000,000
$
10,000
$
5,262,559
$
(5,854,610
)
$
(582,051
)
Net loss
(5,882,795
)
(5,882,795
)
Balance at December 31, 2002
10,000,000
10,000
5,262,559
(11,737,405
)
(6,464,846
)
Expense related to options granted to non-employees
2,708
2,708
Deemed dividend
(1,139,535
)
(1,139,535
)
Net loss
(7,556,657
)
(7,556,657
)
Balance at December 31, 2003 (Restated)
10,000,000
10,000
5,265,267
(20,433,597
)
(15,158,330
)
Deferred compensation related to stock options, net of
    cancellations
4,636,952
$
(4,636,952
)
—
Amortization of deferred stock-based compensation
3,104,186
3,104,186
Expense related to options granted to non-employees
51,104
51,104
Deemed dividend
(5,860,465
)
(5,860,465
)
Net loss
(12,023,054
)
(12,023,054
)
Balance at December 31, 2004
10,000,000
$
10,000
$
9,953,323
$
(1,532,766
)
$
(38,317,116
)
$
(29,886,559
)
See accompanying notes.
F-4
Table of Contents
VALERA PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002
2003
2004
Operating activities
Net loss
$
(5,882,795
)
$
(7,556,657
)
$
(12,023,054
)
Adjustments to reconcile net loss to net cash used in operating
    activities:
Depreciation and amortization
199,522
153,254
257,495
Expense related to options granted to non-employees
—
2,708
51,104
Stock-based compensation
—
—
3,104,186
Change in assets and liabilities:
Accounts receivable
—
—
(4,914,576
)
Other accounts receivable
—
(573,500
)
573,500
Inventories
—
—
(1,365,018
)
Restricted cash
—
—
(100,000
)
Prepaid and other current assets
17,044
(45,167
)
(50,184
)
Security deposits
(227,599
)
(154,616
)
361,915
Accounts payable
116,064
201,176
856,095
Accrued liabilities
—
66,384
1,106,915
Net cash used in operating activities
(5,777,764
)
(7,906,418
)
(12,141,622
)
Investing activities
Capital expenditures
(93,365
)
(147,664
)
(1,610,378
)
Net cash used in investing activities
(93,365
)
(147,664
)
(1,610,378
)
Financing activities
Payment of capital lease obligations
(109,163
)
(71,304
)
(31,687
)
Net proceeds from issuance of convertible preferred stock
—
12,726,055
13,595,084
Net cash (used in) provided by financing activities
(109,163
)
12,654,751
13,563,397
Net (decrease) increase in cash and cash equivalents
(5,980,292
)
4,600,669
(188,603
)
Cash and cash equivalents at beginning of period
6,620,869
640,577
5,241,246
Cash and cash equivalents at end of period
$
640,577
$
5,241,246
$
5,052,643
Supplemental Disclosure of Non-Cash Financing Activities
Deemed dividends on preferred stock
$
—
$
1,139,535
$
5,860,856
See accompanying notes.
F-5
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1.
Organization and Description of Business
Nature of Operations and Basis of Presentation
Valera Pharmaceuticals, Inc. ("Valera" or the
"Company"), is a specialty pharmaceutical company
focused on the acquisition, development and commercialization of
novel prescription pharmaceuticals, particularly for the
treatment of urological and endocrine conditions and disorders.
Valera was incorporated in the state of Delaware on May 30,
2000. On July 1, 2003, Valera changed its name from Hydro
Med Sciences, Inc. Prior to May 30, 2000, the Company
operated as a division of GP Strategies, and was included in
their consolidated financial statements and federal tax returns.
The Company is located in Cranbury, New Jersey. The Company
operates in a single business segment.
The Company has incurred operating losses in each period since
inception. The Company has been able to fund its cash needs to
date through initial funding from one of its investors, GP
Strategies Corporation, and also through the sale of its
preferred stock. The ability of the Company to manage its
operating expenses to a level that can be financed by existing
cash flows and its ability to obtain additional funding is
therefore critical. The Company's management intends to
raise additional equity funds and also enter into collaborative
agreements.
Prior to November 2004, the Company operated as a
development-stage company and did not generate any substantial
revenue. In November 2004, the Company exited the development
stage when it began selling its initial product Vantas.
2.
Basis of Presentation and Significant Accounting Policies
Restatement of 2003 Financial Statements
The Company has determined that in connection with the issuance
of its Series B 10% Cumulative Convertible Preferred Stock,
("Series B Preferred Stock") certain
anti-dilution provisions in its Series A 6% Cumulative
Convertible Preferred Stock ("Series A Preferred
Stock") were activated. Because the shares of Series B
Preferred Stock were sold at a price below the price that the
shares of Series A Preferred Stock were sold, the
conversion price and conversion ratio of the Series A
Preferred Stock were adjusted in accordance with the original
terms of that issuance when each tranche of Series B
Preferred Stock was issued. These adjustments to the conversion
price and the resulting conversion ratio resulted in deemed
dividends being afforded to the holders of the Series A
Preferred Stock. The total deemed dividend for the two tranches
of Series B Preferred Stock issued in 2003 of $1,139,535
was not originally recorded in the Company's 2003 financial
statements but such statements have been restated to reflect
this deemed dividend as an increase of Accumulated Deficit and
an increase in the Series A Preferred Stock.
Use of estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Unaudited pro forma information
In January, 2005, the board of directors authorized management
of the Company to file a registration statement with the
Securities and Exchange Commission permitting the Company to
sell shares of its common stock to the public. If the initial
public offering is completed under the terms presently
anticipated, all of the convertible preferred stock outstanding
at the time of the offering, including accrued dividends will
automatically convert into 51,515,582 shares of common
stock (See Note 8). Unaudited pro forma convertible
preferred stock and stockholders' equity, as adjusted for
the assumed conversion of the Convertible
F-6
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Preferred Stock, is set forth on the accompanying balance sheets
and unaudited pro forma earnings per share information assuming
the conversion of the Convertible Preferred Stock is set forth
on the accompanying statements of operations.
Reclassifications
Certain reclassifications of prior year amounts have been made
to conform to current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased
with a maturity of three months or less to be cash and cash
equivalents. At December 31, 2004, the Company had
substantially all of its cash and cash equivalents deposited
with one financial institution.
Restricted Cash
Restricted cash collateralizes an outstanding letter of credit
associated with the firm that manages some of the Company's
credit card processing. This letter of credit is to be released
during 2005, and accordingly is classified as a current asset.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the
respective assets, generally three to seven years.
Leasehold improvements and capitalized leases are recorded at
the fair market value at the inception of the leases and are
amortized over the shorter period of their estimated useful life
or the lease ranging from five to ten years.
Research and Development
Costs incurred in connection with research and development
activities are expensed as incurred. These costs consist of
direct and indirect costs associated with specific projects as
well as fees paid to various entities that perform research for
the Company.
Inventory
Upon regulatory approval of Vantas, the Company's initial
product, on October 12, 2004 the Company began capitalizing
all costs associated with the manufacturing of Vantas. Inventory
is valued at the lower of cost or market, on a first in first
out ("FIFO") basis. For all periods presented
prior to October 12, 2004, the Company expensed all of its
manufacturing costs as research and development.
Shipping and Handling Costs
Shipping and handling costs incurred for inventory purchases and
product shipments are included within cost of product sales in
the statements of operations.
Stock-based Compensation
As allowed by Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), the Company has
elected to continue to apply the intrinsic value-based method of
accounting prescribed in Accounting Principles Board
("APB") Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25") and,
accordingly, does not recognize compensation expense
F-7
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
for stock option grants made at an exercise price equal to or in
excess of the estimated fair value of the stock at the date of
grant.
Had compensation cost for the Company's outstanding
employee stock options been determined based on the fair value
at the grant dates for those options consistent with
SFAS 123, the Company's net loss and basic and diluted
net loss per share, would have been changed to the following pro
forma amounts:
Year Ended December 31,
2002
2003
2004
Net loss attributable to common shareholders — as
    reported
$
(5,882,795
)
$
(8,696,192
)
$
(17,883,519
)
Add non-cash employee compensation as reported
—
—
3,104,186
Deduct total stock-based employee compensation expense
    determined under fair value based method for all awards
(47,529
)
(46,893
)
(205,445
)
SFAS 123 pro forma net loss attributable to common
    shareholders
$
(5,930,324
)
$
(8,743,085
)
$
(14,984,778
)
Basic and diluted net loss attributable to common shareholders
    per share, as reported
$
(0.59
)
$
(0.87
)
$
(1.79
)
Basic and diluted net loss attributable to common shareholders
    per share, SFAS 123 pro forma
$
(0.59
)
$
(0.87
)
$
(1.50
)
Unaudited pro forma basic and diluted net loss attributable to
    common shareholders per share, (Note 2) SFAS 123
$
(0.34
)
SFAS 123 pro forma information regarding net loss is
required by SFAS 123, and has been determined as if the
Company had accounted for its stock-based employee compensation
under the fair value method prescribed in SFAS 123. The
fair value of the options was estimated at the date of grant
using the minimum value pricing model with the following
assumptions:
Year Ended
December 31,
2002
2003
2004
Risk-free interest rate
2.55
%
3.03
%
3.50
%
Dividend yield
0.00
%
0.00
%
0.00
%
Expected lives (in years)
4.0
4.0
4.0
Weighted-average contractual life
9.8
8.3
8.8
The effects of applying SFAS 123 in this pro forma
disclosure are not indicative of future amounts. Stock option
grants are expensed over their respective vesting periods.
The Company accounts for options issued to non-employees under
SFAS No. 123 and EITF Issue 96-18, "Accounting
for Equity Investments that are Issued to Other than Employees
for Acquiring or in Conjunction with Selling Goods or
Services" ("EITF 96-18"). As such, the value of
such options is periodically remeasured and income or expense is
recognized during their vesting terms.
Deferred Stock Compensation
During the year ended December 31, 2004, in connection with
the grant of stock options to employees and directors, the
Company recorded deferred stock compensation totaling
$4,636,952, representing the difference between the fair value
of common stock on the date such options were granted,
determined in accordance with GAAP, and the exercise price.
Included in this amount is $3,730,512, net of forfeitures,
F-8
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
representing options that were issued in 2002 and were repriced
in 2003, and $906,440, net of forfeitures, of 2004 grants that
were issued below fair value. These amounts are included as a
reduction of stockholders' equity and are being amortized
over the vesting period of the individual options, generally
four years. During the year ended December 31, 2004, the
Company recorded amortization of deferred stock compensation of
$3,104,186.
Income Taxes
The Company utilizes the asset and liability method of
accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws
that will be in effect when the differences are expected to
reverse. A valuation allowance is provided when it is more
likely than not that some portion or all of a deferred tax asset
will not be realized.
Net Loss Per Share
The Company computes basic net loss per share in accordance with
SFAS No. 128, "Earnings per Share"
("SFAS 128"). Under the provisions of
SFAS 128, basic net loss per common share ("Basic
EPS") is computed by dividing net loss by the
weighted-average number of shares of common stock outstanding.
Diluted net loss per share of common stock ("Diluted
EPS") is computed by dividing net loss by the
weighted-average number of shares of common stock and dilutive
common equivalent shares then outstanding. Common stock
equivalent shares consist of the incremental common shares
issuable upon the conversion of preferred stock, and shares of
common stock issuable upon the exercise of stock options.
Diluted EPS is identical to Basic EPS since common equivalent
shares are excluded from the calculation, as their effect is
anti-dilutive for all periods presented.
2002
2003
2004
Numerator:
Net loss
$
(5,882,795
)
$
(7,556,657
)
$
(12,023,054
)
Deemed dividend
—
(1,139,535
)
(5,860,465
)
Numerator for basic and diluted net loss attributable to common
    shareholders per share — net loss attributable for
    common shareholders
$
(5,882,795
)
$
(8,696,192
)
$
(17,883,519
)
Denominator:
Denominator for basic and dilutive net loss attributable to
    common shareholders per share — weighted-average shares
10,000,000
10,000,000
10,000,000
Basic and diluted net loss attributable to common shareholders
    per share
$
(0.59
)
$
(0.87
)
$
(1.79
)
Denominator for unaudited pro forma basic and diluted net loss
    attributable to common shareholders per share —
    weighted-average shares (Note 2)
44,206,980
Unaudited pro forma basic and diluted net loss attributable to
    common shareholders per share (Note 2)
$
(0.40
)
Long-lived Assets
In accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"), the Company assesses the
recoverability of long-lived assets by determining whether the
F-9
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
carrying value of such assets can be recovered through
undiscounted future operating cash flows. If impairment is
indicated, the Company measures the amount of such impairment by
comparing the fair value to the carrying value. There have been
no indicators of impairment through December 31, 2004.
Concentration of Credit Risk
The financial instrument that potentially subjects the Company
to concentration of credit risk is cash. The Company places its
cash with high-credit quality financial institutions.
Concentrations of credit risk, with respect to this financial
instrument, exist to the extent of amounts presented in the
financial statements. In 2004, one customer accounted for 10.1%
of our net sales and 11.6% of our outstanding receivable at
December 31, 2004.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial
instruments, which include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate
their fair values.
Revenue Recognition
The Company's revenue recognition policies are in
accordance with Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition in Financial Statements"
("SAB 104"), and SFAS No. 48, "Revenue
Recognition When Right of Return Exists"
("SFAS 48"), which provides guidance on revenue
recognition in financial statements, and is based on the
interpretations and practices developed by the Securities and
Exchange Commission. SFAS 48 and SAB 104 require that
four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services rendered;
(3) the seller's price to the buyer is fixed and
determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the
fee charged for services rendered and products delivered and the
collectibility of those fees. Should changes in conditions cause
management to determine that these criteria are not met for
certain future transactions, revenue recognition for those
transactions will be delayed and the Company's revenue
could be adversely affected.
Allowance for Accounts Receivable
The Company maintains an allowance for accounts receivable,
which includes an allowance for doubtful accounts related to the
estimated losses that may result from the inability of its
customers to make required payments. This allowance is
determined based upon historical experience and any specific
customer collection issues that have been identified. The
Company began selling its first product on November 8, 2004
and has not experienced significant credit losses related to an
individual customer or groups of customers in any particular
industry or geographic area. Also included in the allowance for
accounts receivable is an allowance for sales returns, early
payment discounts, and estimated credit card fees.
Allowance for accounts receivable consists of the following:
December 31,
2003
2004
Allowance sales returns
—
270,613
Allowance for doubtful accounts
—
83,957
Allowance for discounts and credit card fees
—
80,455
$
—
$
435,025
F-10
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Preferred Stock
Dividends
The Company records deemed dividends when modifications to its
preferred stock are required in accordance with EITF 98-5
and EITF 00-27. Such modifications occurred in 2003 and
2004 resulting in deemed dividends of $1,139,535 in 2003 and
$5,860,465 in 2004.
Recently Issued Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 123 (revised
2004), "Share-Based Payment"
("SFAS 123(R)"), which is a revision of SFAS
No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123(R)
supersedes APB 25, and amends FASB Statement No. 95
"Statement of Cash Flows". Generally, the approach in
SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an
alternative.
SFAS 123(R) must be adopted no later than July 1,
2005. Early adoption will be permitted in periods in which
financial statements have not been issued. The Company expects
to adopt SFAS 123(R) on July 1, 2005.
SFAS 123(R) permits public companies to adopt its
requirements using one of two methods:
1. A "modified prospective" method in which
    compensation cost is recognized beginning with the effective
    date (a) based on the requirements of SFAS 123(R) for
    all share-based payments granted after the effective date and
    (b) based on the requirements of SFAS 123(R) for all
    awards granted to employees prior to the effective date of
    SFAS 123(R) that remain unvested on the effective date.
2. A "modified retrospective" method which
    includes the requirements of the modified prospective method
    described above, but also permits entities to restate based on
    the amounts previously recognized under SFAS 123 for
    purposes of pro forma disclosures either (a) all prior
    periods presented or (b) prior interim periods of the year
    of adoption.
The company is currently evaluating which alternative to adopt.
As permitted by SFAS 123, the company currently accounts
for share-based payments to employees using APB 25's
intrinsic value method and as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123(R)'s fair value method will have
a significant impact on the Company's results of
operations, although it will have no impact on the
Company's overall financial position. The impact of
adoption of SFAS 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted SFAS 123(R)
in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share in
Note 2 to the Company's financial statements.
SFAS 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as
financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows
in periods after adoption. The Company cannot estimate what
those amounts will be in the future (because they depend on,
among other things, when employees exercise stock options).
F-11
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
3.
Inventory
Inventories consist of the following:
December 31,
2003
2004
Raw Materials
$
—
$
707,893
Work in process
—
596,866
Finished goods
—
60,259
$
—
$
1,365,018
4.
Property and Equipment
Property and equipment consists of the following:
December 31,
Useful Lives
2003
2004
Laboratory equipment
5 years
$
629,841
$
1,389,871
Furniture and fixtures
7 years
41,976
60,286
Office equipment
5 years
23,565
41,617
Computer equipment
5 years
122,517
326,60
Computer software
3 years
51,334
159,117
Leasehold improvements
1-10 years
97,124
599,584
966,357
2,576,735
Less accumulated depreciation and amortization
(614,935
)
(872,430
)
Fixed assets, net
$
351,422
$
1,704,305
Depreciation and amortization expense was $199,522, $153,254 and
$257,495, for the years ended December 31, 2002, 2003 and
2004, respectively. Included in fixed assets at
December 31, 2003 and 2004 are approximately $385,000 of
assets subject to capital lease obligations with accumulated
amortization of $358,538 and $376,560 as of December 31,
2003 and 2004, respectively.
5.
Accrued Liabilities
Accrued liabilities consist of the following:
December 31,
2003
2004
Accrued royalties
$
—
$
307,258
Accrued compensation, bonus and benefits
—
416,821
Accrued commissions
—
245,580
Accrued other
101,383
238,639
$
101,383
$
1,208,298
F-12
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
6.
Capital Lease Obligations
The minimum future lease payments related to capital leases as
of December 31, 2004 are as follows:
Year ending December 31:
2005
$
22,316
2006
18,723
Total minimum lease payments
41,039
Less amount representing interest payments
5,973
Present value of minimum lease payments
35,066
Less current portion
17,873
Long-term portion
$
17,193
7.
Commitments
The Company leases its facilities and some equipment under
noncancellable operating lease agreements. As of
December 31, 2004, the minimum future lease payments under
these leases are as follows:
Year ending December 31:
2005
$
826,753
2006
844,877
2007
839,497
2008
839,497
2009
839,497
Thereafter
3,567,864
Total rent expense was approximately $405,000, $422,000, and
$663,817 for the years ended December 31, 2002, 2003 and
2004, respectively. The Company's building lease expires
March 31, 2014, and the equipment lease expires October
2006.
8.     Capitalization
Common Stock
The Company had 10,000,000 shares of common stock
outstanding at December 31, 2004 and its par value was
$.001. The Company is authorized to issue 75,000,000 shares
of common stock with a par value of $.001 per share. Each
holder of common stock is entitled to one vote of each share of
common stock held of record on all matters on which stockholders
generally are entitled to vote.
Convertible Preferred Stock
The Company is authorized to issue 43,100,000 shares of
$.001 par value convertible preferred stock of which
7,000,000 shares have been designated Series A
Preferred Stock, 24,500,000 shares have been designated
Series B Preferred Stock and 11,600,000 shares have
been designated Series C 6% Cumulative
F-13
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
Convertible Preferred Stock ("Series C Preferred
Stock"). Such preferred stock is subject to the following
rights and privileges:
Voting
Preferred stockholders shall be entitled to cast the number of
votes equal to the number of shares of common stock into which
such shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock (together
referred to as the "Convertible Preferred Stock")
could then be converted and shall have full voting rights and
powers equal to the voting rights and powers of the common stock
on all matters submitted to the stockholders.
Dividends
The Convertible Preferred Stock shall be entitled to receive
dividends on an as-converted basis with shares of common stock
when, as and if declared by the Board of Directors out of funds
legally available therefore.
In addition to the foregoing provision, each share of
Series A Preferred Stock and Series C Preferred Stock
shall accrue dividends at the rate of 6% of its respective
Preferred Stock Stated Value, and each share of the
Series B Preferred Stock shall accrue dividends at the rate
of 10% of the Series B Stated Value per share (as such
stated value may be adjusted for any stock dividends,
combinations or splits with respect to such shares) per annum,
which shall accrue daily based on a 360-day year, payable when
and as declared by the Board of Directors of the Company out of
funds legally available. The Series A Preferred Stock
dividends shall only accrue from the date of the first issuance
of the shares of Series C Preferred Stock, August 16,
2004. No dividends have been declared by the Board of Directors
through December 31, 2004.
Liquidation
In the event of any voluntary or involuntary liquidation, sale,
dissolution or winding up of the Company, subject to the rights
of the series of preferred stock that may from time to time come
into existence, the holders of the Convertible Preferred Stock
then outstanding shall be entitled to receive, out of the assets
of the Company available for distribution to its stockholders,
before any payment shall be made in respect of the Common Stock,
an amount per share of Convertible Preferred Stock equal to the
Series A Stated Value, Series B Stated Value or the
Series C Stated Value, as the case may be, plus all accrued
but unpaid dividends thereon to the date fixed for distribution
(the "Convertible Preferred Liquidation Amount"). If
upon the liquidation, dissolution or winding up of the Company,
the assets of the Company available for distribution to its
stockholders shall be insufficient to pay the full Convertible
Preferred Liquidation Amount, then all the assets so available
for distribution to its stockholders shall be distributed
ratably to the holders of the Convertible Preferred Stock in
proportion to the aggregate amounts that would be payable to
such holders if the assets of the Company were sufficient to pay
the full amount to which they were entitled pursuant to this
section and nothing more.
Conversion
Each share of Convertible Preferred Stock shall be convertible,
at the option of the holder thereof, at any time and from time
to time after the issuance of such share, at the office of the
Company or any transfer agent for such stock, into fully paid
and nonassessable shares of common stock of the Company. The
number of shares of common stock to which a holder of
Convertible Preferred Stock shall be entitled upon conversion
shall be the product obtained by multiplying the Convertible
Preferred Conversion Rate then in effect by the number of shares
of Convertible Preferred Stock, being converted. The Convertible
Preferred Conversion Rate in effect at any time for conversion
of any series of the Convertible Preferred shall be the quotient
obtained by dividing (i) the Convertible Preferred Stated
Value for such series of Convertible Preferred Stock
F-14
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
plus an amount equal to all accrued and unpaid dividends per
share of such Convertible Preferred Stock as of the conversion
date (the "Dividend Amount") by (ii) the
Conversion Price for such series of Convertible Preferred Stock;
provided, however that a holder of Convertible Preferred Stock
may elect to receive all or a portion of the Dividend Amount in
cash upon conversion of the Convertible Preferred Stock, in
which event the portion of the Dividend Amount paid in cash
shall not be added to the Convertible Preferred Stated Value in
determining the Conversion Rate for such holder of Convertible
Preferred Stock. The initial conversion price for the
Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock shall be $0.50, $0.725 and $1.00
respectively.
The initial Conversion Price for each series of Convertible
Preferred Stock shall be adjusted from time to time in
accordance with the agreement. In accordance with the
anti-dilution feature in the Series A Preferred Stock,
there was a deemed dividend for the years ended
December 31, 2003 and 2004 of $1,139,535 and $5,860,465,
respectively. Conversion will occur automatically concurrent
with a firm underwritten public offering of not less than
$25,000,000, or on the date specified by vote or written consent
or agreement of holders of at least 80% of the then outstanding
shares of Convertible Preferred Stock voting together as a class
on an as-if-converted basis.
The following table summarizes certain information about the
Convertible Preferred Stock for each series at December 31,
2004:
Shares
Undeclared
Authorized
Issued and
Liquidation
Reserved for
Accrued
Shares
Outstanding
Preference
Conversion
Dividends
Series A
7,000,000
7,000,000
$
7,160,638
14,321,276
$
160,638
Series B
24,500,000
22,068,966
18,362,875
25,328,105
2,362,875
Series C
11,600,000
11,600,000
11,866,201
11,866,201
266,201
43,100,000
40,668,966
$
37,389,714
51,515,582
$
2,789,714
9.
Stock Options
During 2002, the Company adopted the Valera Pharmaceuticals
Equity Incentive Plan which provides for the granting of
nonqualified and incentive stock options, as defined by the
Internal Revenue Code, to key employees of the Company at prices
not less than the fair market value at the date of grant for
incentive stock options granted. The option price for each share
of common stock for non-qualified options is determined by the
Board of Directors and may be more or less than the fair market
value of a share of common stock.
During 2004, the number of options that could be granted to
employees to purchase under the Company Equity Incentive Plan
was amended to a maximum of 7,850,000 shares of common
stock. In addition, the exercise price of all options issued
prior to 2003 was amended in October 2003 to $0.50, the fair
market value at that time. In accordance with FASB
Interpretation ("FIN") No. 44, the repriced
options will be accounted for as variable from the date of the
modification to the date the options are exercised, forfeited,
or expire. In connection with these options, the Company
recorded $3,730,512, net of forfeitures, in deferred stock-based
compensation in 2004. Non-cash compensation expense related to
these repriced options was $3,031,119 in 2004.
F-15
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
The following table summarizes option activity for the
Company's common stock for the years ended
December 31, 2002, 2003, and 2004:
Common
Weighted-
Stock
Average
Options
Exercise Price
Plan adopted September 23, 2002
Granted
1,720,500
$
1.00
Exercised
—
Forfeited
—
Outstanding at December 31, 2002
1,720,500
Granted
2,935,650
$
0.50
Exercised
—
Forfeited
(23,000
)
$
0.50
Outstanding at December 31, 2003
4,633,150
Granted
2,123,000
$
0.50
Exercised
—
Forfeited
(39,600
)
$
0.50
Outstanding at December 31, 2004
6,716,550
The following table summarizes information about vested stock
options outstanding:
December 31,
2002
2003
2004
Vested Stock Options
430,125
860,250
2,004,888
Weighted average exercise price
$
1.00
$
0.50
$
0.50
The following table summarizes information about stock options
outstanding at December 31, 2004:
Options
Weighted-
Weighted-
Range of
Outstanding
Average
Average
Exercise
and
Options
Remaining
Exercise
Prices
Exercisable
Vested
Contractual Life
Price
$
0.50
6,716,550
2,004,888
9
$
0.50
The weighted average fair value of options granted as of
December 31, 2004 was $0.64.
In connection with the granting of employee stock options in
2004, the Company recorded deferred compensation of $906,440,
net of forfeitures. Deferred compensation is being amortized
over the vesting period of the options resulting in non-cash
stock-based compensation expense of $73,067 for the year ended
December 31, 2004. There was no deferred compensation
recorded in prior years.
For the years ended December 31, 2003 and 2004 the Company
granted a total of 65,000 and 30,000, respectively, in stock
options to certain consultants. The Company has accounted for
these options in accordance with EITF 96-18 and,
accordingly, recorded non-cash expense of $2,708 and $51,104 for
the years ended December 31, 2003 and 2004 respectively. No
options were granted to consultants in 2002. The Company will
continue to remeasure the fair value of unvested stock options
to these consultants.
10.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting and the amount used for
income tax purposes. The Company's
F-16
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
deferred tax assets relate primarily to net operating loss
carryforwards, research and development tax credits, and
non-cash stock-based compensation. At December 31, 2003 and
2004, a valuation allowance was recorded to fully offset the net
deferred tax asset. The change in the valuation allowance for
the years ended December 31, 2003, 2004 was approximately
$3,213,000 and $4,913,000, respectively. Significant components
of the Company's deferred tax assets were as follows:
December 31,
2003
2004
Deferred tax assets:
Net operating loss carryforwards
$
4,990,000
$
8,050,000
Research and development credits
853,000
1,131,000
Stock-based compensation
—
1,085,000
Amortization of stock-based compensation
—
156,000
Non-employee stock compensation
1,000
22,000
Other
—
353,000
Total gross deferred tax assets
5,844,000
10,797,000
Deferred tax liabilities:
Depreciation and amortization
111,000
151,000
Total gross deferred tax liabilities
111,000
151,000
Valuation allowance for deferred tax assets
(5,733,000
)
(10,646,000
)
Net deferred tax assets
$
—
$
—
As of December 31, 2004, the Company had federal net
operating loss carryforwards of approximately $20,000,000. The
net operating loss carryforwards will expire at various dates
beginning in 2022, if not utilized. The Company has research and
development tax credit carry forwards at December 31, 2004
of approximately $1,131,000, which will begin to expire in 2022.
If an ownership change, as defined under Internal Revenue Code
Section 382, occurs the use of these carry forwards may be
subject to limitation.
Benefit for income tax consists of:
December 31,
2002
2003
2004
Federal
$
—
$
—
$
—
State
—
—
243,618
Total
$
—
$
—
$
243,618
In 2004, the New Jersey Economic Development Authority approved
the Company's application to sell New Jersey State income
tax benefits under the New Jersey Technology Tax Transfer
Program (the "Program"). During the fourth quarter of
2004, the Company recognized $243,618 from the sale of State of
New Jersey income tax benefits. The Program requires that the
Company maintain certain employment levels in New Jersey and
that the proceeds from the sale of the tax benefits be spent in
New Jersey.
F-17
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
A reconciliation of the statutory tax rates and the effective
tax rates for the periods ended:
December 31,
2002
2003
2004
Statutory rate
(34
)%
(34
)%
(34
)%
State and local income taxes (net of federal tax benefit)
(6
)
(6
)
(6
)
Research and development tax credits
(4
)
(4
)
(2
)
Change in valuation allowance
44
44
40
0
%
0
%
(2
)%
11.
Related Party Transactions
In June 2004, David S. Tierney, the Company's President and
CEO, loaned the Company $200,000 at prime plus 1% above the UBS
Margin Interest Rate. The loan was repaid on November 3,
2004. Interest in the amount of $1,574 is included in interest
expense for 2004.
12.
Pension Plan
The Company sponsors a 401(k) plan for eligible employees. The
Company's contributions to the plan are discretionary and
are 50% of the employee's contribution, not to exceed 5% of
total compensation. The total Company 401(k) contributions
amounted to approximately $40,000, $49,000 and $55,358 for the
years ended December 31, 2002, 2003 and 2004, respectively.
13.
Subsequent Events
On March 8, 2005, the Company entered into an additional
building lease of approximately 21,300 square feet for its
office and research and development needs. The lease will be
co-terminus with its existing building lease (See Note 7).
From inception through June 30, 2005, the base rent will be
$43,044 per month. From July 1, 2005 until
June 30, 2010, the annual base rent will be $537,808.
Commencing July 1, 2010, the annual base rent will be
$707,999.
F-18
Table of Contents
VALERA PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)
14.
Selected Quarterly Financial Data (Unaudited)
Quarter Ended
March 31
June 30
September 30
December 31
2003
Total revenue
$
1,484
$
1,585
$
—
$
4,284
Loss from operations
(1,362,145
)
(1,504,341
)
(1,867,930
)
(2,835,375
)
Net loss
(1,369,119
)
(1,503,083
)
(1,855,843
)
(2,828,612
)
Net loss attributable to common shareholders
(1,369,119
)
(2,549,060
)
(1,855,843
)
(2,922,170
)
Basic and diluted net loss attributable to common shareholders
    per common share
$
(0.14
)
$
(0.25
)
$
(0.19
)
$
(0.29
)
2004
Total revenue
$
—
—
$
134,636
$
5,511,286
Cost of product sales
—
—
—
608,150
Loss from operations
(2,017,870
)
(3,539,880
)
(3,569,788
)
(3,132,982
)
Benefit for income taxes
—
—
—
(243,618
)
Net loss
(2,016,161
)
(3,545,041
)
(3,567,872
)
(2,893,980
)
Net loss attributable to common shareholders
(2,016,161
)
(3,640,800
)
(9,332,578
)
(2,893,980
)
Basic and diluted net loss attributable to common shareholders
    per common share
$
(0.20
)
$
(0.36
)
$
(0.93
)
$
(0.29
)
Diluted EPS is identical to Basic EPS since common stock
equivalent shares are excluded from the calculation, as their
effect is anti-dilutive in all periods presented.
F-19
Table of Contents
VALERA PHARMACEUTICALS, INC.
Valuation and Qualifying Accounts Schedule
Balance at
Charged to
Charged
Beginning of
Cost and
to Other
Balance at
Period
Expenses
Accounts
Deductions
End of Period
For the year ended December 31, 2004:
Allowance for Sales Returns
$
—
$
270,613
$
—
$
—
$
270,613
For the year ended December 31, 2003:
Allowance for Sales Returns
—
—
—
—
—
For the year ended December 31, 2002:
Allowance for Sales Returns
—
—
—
—
—
For the year ended December 31, 2004:
Allowance for Doubtful Accounts
—
83,957
—
—
83,957
For the year ended December 31, 2003:
Allowance for Doubtful Accounts
—
—
—
—
—
For the year ended December 31, 2002:
Allowanced for Doubtful Accounts
—
—
—
—
—
For the year ended December 31, 2004:
Allowance for Discounts and Credit Card Fees
—
91,067
—
10,612
80,455
For the year ended December 31, 2003:
Allowance for Discounts and Credit Card Fees
—
—
—
—
—
For the year ended December 31, 2002:
Allowance for Discounts and Credit Card Fees
—
—
—
—
—
For the year ended December 31, 2004:
Tax Valuation Allowance
5,733,000
4,913,000
—
—
10,646,000
For the year ended December 31, 2003:
Tax Valuation Allowance
2,521,000
3,212,000
—
—
5,733,000
For the year ended December 31, 2002:
Tax Valuation Allowance
94,000
2,427,000
—
—
2,521,000
F-20
Table of Contents
Dealer Prospectus Delivery Obligation
Through and
including                     ,
2005 (the 25th day after the date of this prospectus), all
dealers that buy, sell, or trade our common stock, whether or
not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
Table of Contents
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses of Issuance and Distribution
The following table sets forth the costs, other than
underwriting discounts and commission, payable by us in
connection with the sale of common stock being registered. All
expenses, except the SEC registration fee and the NASD filing
fee, are estimated.
Amount
to be Paid
Securities and Exchange Commission registration fee
$
8,798.08
NASD filing fee Nasdaq National Market listing fee
7,975.00
Printing and engraving expenses
*
Transfer agent and registrar fees and expenses
*
Legal fees and expenses
*
Accountants' fees and expenses
*
Blue Sky fees and expenses (including legal fees)
*
Miscellaneous expenses
*
Total
$
*
*
To be filed by amendment.
Item 14.
Indemnification of Directors and Officers.
Our certificate of incorporation provides that we will indemnify
our directors and officers to the fullest extent permitted by
the Delaware General Corporation Law (DGCL). Section 145 of
the DGCL provides that a corporation has the power to indemnify
a director, officer, employee, or agent of the corporation and
certain other persons serving at the request of the corporation
in related capacities against expenses (including
attorneys' fees), judgments, fines, and amounts paid in
settlements actually and reasonably incurred by the person in
connection with a threatened, pending, or completed action, suit
or proceeding to which he or she is or is threatened to be made
a party by reason of such position, if such person acted in good
faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation, and, in
any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful, except that, in the
case of actions brought by or in the right of the corporation,
indemnification is limited to expenses (including attorney fees)
actually and reasonably incurred by the person in connection
with defense or settlement of such action or suit and no
indemnification shall be made with respect to any claim, issue,
or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Court of Chancery or other adjudicating court determines that,
despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
In addition, to the extent that a present or former director or
officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit, or proceeding
described above (or claim, issue, or matter therein), such
person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such
person in connection therewith. Expenses (including
attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative, or investigative
action, suit, or proceeding may be advanced by the corporation
upon receipt of an undertaking by such person to repay such
amount if it is ultimately determined that such person is not
entitled to indemnification by the corporation under
Section 145 of the DGCL.
Our certificate of incorporation provides that we will, to the
fullest extent permitted by law, indemnify, and upon request
shall advance expenses to, any person made or threatened to be
made a party to an action or
II-1
Table of Contents
proceeding by reason of the fact that he or she (or his or her
testators or intestate) is or was our director or officer or
serves or served at any other corporation, partnership, joint
venture, trust or other enterprise in a similar capacity or as
an employee or agent at our request, including service with
respect to employee benefit plans, against expenses (including
attorneys' fees and expenses), judgments, fines, penalties,
and amounts paid in settlement incurred in connection with the
investigation, preparation to defend, or defense of such action,
suit, proceeding, or claim. However, we are not required to
indemnify or advance expenses in connection with any action,
suit, proceeding, claim or counterclaim initiated by or on
behalf of such person.
Our certificate of incorporation also provides that, to the
fullest extent permitted by law, a director of the corporation
shall not be personally liable to the corporation or our
stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of
the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) for payments of unlawful dividends or
unlawful stock repurchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal
benefit.
Any repeal or modification of these provisions of our
certificate of incorporation shall not adversely affect any
right or protection of a director of the corporation for or with
respect to any acts or omissions of that director occurring
prior to the amendment or repeal.
We expect to obtain insurance policies under which our directors
and officers are insured, within the limits and subject to the
limitations of those policies, against certain expenses in
connection with the defense of, and certain liabilities which
might be imposed as a result of, actions, suits or proceedings
to which they are parties by reason of being or having been
directors or officers.
Reference is also made to the Underwriting Agreement filed as
Exhibit 1.1 to the Registration Statement for information
concerning the underwriters' obligation to indemnify us and
our officers and directors in certain circumstances.
Item 15.
Recent Sales of Unregistered Securities.
Set forth below is information regarding securities sold by us
since January 1, 2002 which were not registered under the
Securities Act.
(a) Issuances and sales of preferred stock.
(1) In May 2003, we issued and sold an aggregate of
    15,172,414 shares of our series B preferred stock at a
    price per share of $0.725 to various accredited investors for an
    aggregate offering price of approximately $11,000,000.
(2) In June 2003, we issued and sold an aggregate of
    1,379,310 shares of our series B preferred stock at a
    price per share of $0.725 to various accredited investors for an
    aggregate offering price of approximately $1,000,000.
(3) In December 2003, we issued and sold an aggregate
    of 2,068,966 shares of our series B preferred stock at
    a price per share of $0.725 to an accredited investor for an
    aggregate offering price of approximately $1,500,000.
(4) In June 2004, we issued and sold an aggregate of
    3,448,276 shares of our series B preferred stock at a
    price per share of $0.725 to various accredited investors for an
    aggregate offering price of approximately $2,500,000.
(5) In August 2004, we issued and sold an aggregate of
    11,600,000 shares of our series C preferred stock at a
    price per share of $1.00 to various accredited investors for an
    aggregate offering price of approximately $11,600,000.
No underwriters were involved in the foregoing sales of
    securities. The securities described in this paragraph (a)
    of Item 15 were issued to a combination of
    U.S. investors and one Canadian investor in reliance upon
    the exemption from the registration requirements of the
    Securities Act, as set forth
II-2
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in Section 4(2) under the Securities Act and Rule 506
    of Regulation D promulgated thereunder relating to sales by
    an issuer not involving any public offering, to the extent an
    exemption from such registration was required. The purchasers of
    shares of our stock described above represented to us in
    connection with their purchase that they were accredited
    investors and were acquiring the shares for investment and not
    distribution, that they could bear the risks of the investment
    and could hold the securities for an indefinite period of time.
    The purchasers received written disclosures that the securities
    had not been registered under the Securities Act and that any
    resale must be made pursuant to a registration or an available
    exemption from such registration. The sales of these securities
    were made without general solicitation or advertising.
(b) Stock Option Grants.
(1) In September 2002, we issued to certain of our
    employees options to purchase an aggregate of
    1,720,500 shares of our common stock at an exercise price
    of $1.00 per share. The exercise price was lowered to
    $0.50 per share in December 2003.
(2) In December 2003, we issued to certain of our
    employees options to purchase an aggregate of
    2,935,650 shares of our common stock at an exercise price
    of $0.50 per share.
(3) In June 2004, we issued to one of our employees
    options to purchase an aggregate of 30,000 shares of our
    common stock at an exercise price of $0.50 per share.
(4) In July 2004, we issued to certain of our
    employees options to purchase an aggregate of
    570,000 shares of our common stock at an exercise price of
    $0.50 per share.
(5) In August 2004, we issued to certain of our
    employees options to purchase an aggregate of
    105,000 shares of our common stock at an exercise price of
    $0.50 per share.
(6) In September 2004, we issued to certain of our
    employees options to purchase an aggregate of
    1,313,000 shares of our common stock at an exercise price
    of $0.50 per share.
(7) In October 2004, we issued to certain of our
    employees options to purchase an aggregate of 105,000 shares of
    our common stock at an exercise price of $0.50 per share.
(8) In January 2005, we issued to certain of our
    employees options to purchase an aggregate of 32,000 shares
    of our common stock at an exercise price of $1.00 per share.
The stock option grants described in this paragraph (b) of
    Item 15 were made pursuant to written compensatory plans or
    agreements in reliance on the exemption provided by
    Rule 701 promulgated under the Securities Act.
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Table of Contents
Item 16.
Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit
Number
Exhibit
1.1*
Form of Underwriting Agreement
3.1
Amended and Restated Certificate of Incorporation
3.2*
Amended and Restated Certificate of Incorporation (to be
    effective upon completion of the offering)
3.3
Bylaws
3.4*
Amended and Restated Bylaws (to be effective upon completion of
    the offering)
4.1*
Specimen Common Stock Certificate
4.2
Second Amended and Restated Investor Rights Agreement dated
    August 16, 2004
4.3
Form of Incentive Stock Award Agreement
4.4
Form of Non-Qualified Stock Option Agreement
5.1*
Opinion of Pepper Hamilton LLP
10.1
Executive Employment Agreement between Valera Pharmaceuticals,
    Inc. and David S. Tierney dated September 16, 2003
10.2*
License and Distribution Agreement between Hydro Med Sciences,
    Inc. and Paladin Labs, Inc. dated October 3, 2002
10.3*
Investment Agreement between Hydro Med Sciences, Inc. and
    Paladin Labs, Inc. dated October 3, 2002
10.4*
License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and Key Oncologics dated
    September 17, 2003
10.5
Termination Agreement, License Back and Option between Hydro Med
    Sciences, Inc. and Shire US Inc. dated December 21, 2001
10.6
Termination of Agreement dated September 12, 1990 between
    National Patent Development Corporation and The Population
    Council, Inc. dated October 1, 1997
10.7
Amendment to the Termination of the Joint Development Agreement
    between GP Strategies Corporation and The Population Council,
    Inc. dated November 29, 2001
10.8
Amendment No. 2 to Termination Agreement between Valera
    Pharmaceuticals, Inc. and The Population Council, Inc. dated
    August 31, 2004
10.9
Lease Agreement between National Patent Development Corporation
    and Cedar Brook Corporate Center, L.P. dated October 6, 1997
10.10
Amendment to Lease between Valera Pharmaceuticals, Inc. and
    Cedar Brook Corporate Center, L.P. dated January 7, 2004
10.11
Lease Agreement between Valera Pharmaceuticals, Inc. and Cedar
    Brook 7 Corporate Center, L.P. dated March 8, 2005
10.12
Contribution Agreement between Hydro Med Sciences, Inc. and GP
    Strategies Corporation dated June 30, 2000
10.13
License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and BioPro Pharmaceutical, Inc. dated
    January 28, 2005
10.14
Valera Pharmaceuticals, Inc. 2002 Equity Incentive Plan
10.15*
Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Urology Network dated November 29, 2004
10.16*
Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Urology Network (on behalf of U.S. Urology)
    dated December 9, 2004
10.17
Agreement between National Patent Development Corporation and
    Dento-Med Industries, Inc. dated November 30, 1989
23.1
Consent of Ernst & Young LLP
23.2*
Consent of Pepper Hamilton LLP (included in Exhibit 5.1)
24.1
Power of Attorney (set forth on the signature page to this
    registration statement)
* To be filed by amendment.
(b) Financial Statement Schedules.
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Table of Contents
Financial statements and schedule filed as a part of this
registration statement are listed in the Index to Financial
Statements on page F-1. All other financial statement schedules
are omitted because they are not applicable or not required, or
because the required information is included in the financial
statements or notes thereto.
Item 17.
Undertakings
(1) The undersigned registrant hereby undertakes to provide
to the underwriters at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(3) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the
    Securities Act of 1933, the information omitted from the form of
    prospectus filed as part of this registration statement in
    reliance upon Rule 430A and contained in a form of
    prospectus filed by the registrant pursuant to
    Rule 424(b)(1) or (4) or 497(h) under the Securities
    Act shall be deemed to be part of this registration statement as
    of the time it was declared effective.
(ii) For the purpose of determining any liability under the
    Securities Act of 1933, each post-effective amendment that
    contains a form of prospectus shall be deemed to be a new
    registration statement relating to the securities offered
    therein, and the offering of such securities at that time shall
    be deemed to be the initial
bona fide
offering thereof.
II-5
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in City of Cranbury, State of
New Jersey on March 11, 2005.
VALERA PHARMACEUTICALS, INC.
By:
/s/
David S. Tierney,
    M.D.
Name: David S. Tierney, M.D.
Title:
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints David S. Tierney and Daniel J. Hayes, and each of them,
as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any or
all amendments or supplements to this registration statement,
whether pre-effective or post-effective, including any
subsequent registration statement for the same offering which
may be filed under Rule 462(b) under the Securities Act of
1933, as amended, and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing necessary or appropriate to
be done with respect to this registration statement or any
amendments or supplements hereto in the premises, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following
persons, in the capacities and on the dates indicated.
Title
Date
Signature
/s/
David S.
    Tierney, M.D.
David
    S. Tierney, M.D.
President, Chief Executive Officer and Director (Principal
    Executive Officer)
March 11, 2005
/s/
Daniel J. Hayes
Daniel
    J. Hayes
Director of Finance and Administration (Principal Financial
    Officer and Principal Accounting Officer)
March 11, 2005
/s/
James C. Gale
James
    C. Gale
Chairman of the Board of Directors
March 11, 2005
/s/
David
    Dantzker, M.D.
David
    Dantzker, M.D.
Director
March 11, 2005
/s/
Jerome Feldman
Jerome
    Feldman
Director
March 11, 2005
/s/
Hubert
    Huckel, M.D.
Hubert
    Huckel, M.D.
Director
March 11, 2005
II-6
Table of Contents
Title
Date
Signature
/s/
Jeffrey Krauss
Jeffrey
    Krauss
Director
March 11, 2005
/s/
Ogden R. Reid
Ogden
    R. Reid
Director
March 11, 2005
/s/
Howard Silverman
Howard
    Silverman
Director
March 11, 2005
/s/
John T. Spitznagel
John
    T. Spitznagel
Director
March 11, 2005
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Table of Contents
INDEX TO EXHIBITS
Exhibit
Number
Exhibit
1
.1*
Form of Underwriting Agreement
3
.1
Amended and Restated Certificate of Incorporation
3
.2*
Amended and Restated Certificate of Incorporation (to be
    effective upon completion of the offering)
3
.3
Bylaws
3
.4*
Amended and Restated Bylaws (to be effective upon completion of
    the offering)
4
.1*
Specimen Common Stock Certificate
4
.2
Second Amended and Restated Investor Rights Agreement dated
    August 16, 2004
4
.3
Form of Incentive Stock Award Agreement
4
.4
Form of Non-Qualified Stock Option Agreement
5
.1*
Opinion of Pepper Hamilton LLP
10
.1
Executive Employment Agreement between Valera Pharmaceuticals,
    Inc. and David S. Tierney dated September 16, 2003
10
.2*
License and Distribution Agreement between Hydro Med Sciences,
    Inc. and Paladin Labs, Inc. dated October 3, 2002
10
.3*
Investment Agreement between Hydro Med Sciences, Inc. and
    Paladin Labs, Inc. dated October 3, 2002
10
.4*
License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and Key Oncologics dated
    September 17, 2003
10
.5
Termination Agreement, License Back and Option between Hydro Med
    Sciences, Inc. and Shire US Inc. dated December 21, 2001
10
.6
Termination of Agreement dated September 12, 1990 between
    National Patent Development Corporation and The Population
    Council, Inc. dated October 1, 1997
10
.7
Amendment to the Termination of the Joint Development Agreement
    between GP Strategies Corporation and The Population Council,
    Inc. dated November 29, 2001
10
.8
Amendment No. 2 to Termination Agreement between Valera
    Pharmaceuticals, Inc. and The Population Council, Inc. dated
    August 31, 2004
10
.9
Lease Agreement between National Patent Development Corporation
    and Cedar Brook Corporate Center, L.P. dated October 6, 1997
10
.10
Amendment to Lease between Valera Pharmaceuticals, Inc. and
    Cedar Brook Corporate Center, L.P. dated January 7, 2004
10
.11
Lease Agreement between Valera Pharmaceuticals, Inc. and Cedar
    Brook 7 Corporate Center, L.P. dated March 8, 2005
10
.12
Contribution Agreement between Hydro Med Sciences, Inc. and GP
    Strategies Corporation dated June 30, 2000
10
.13
License and Distribution Agreement between Valera
    Pharmaceuticals, Inc. and BioPro Pharmaceutical, Inc. dated
    January 28, 2005
10
.14
Valera Pharmaceuticals, Inc. 2002 Equity Incentive Plan
10
.15*
Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Urology Network dated November 29, 2004.
10
.16*
Group Purchasing Agreement between Valera Pharmaceuticals, Inc.
    and International Urology Network (on behalf of
    U.S. Urology) dated December 9, 2004
10
.17
Agreement between National Patent Development Corporation and
    Dento-Med Industries, Inc. dated November 30, 1989
23
.1
Consent of Ernst & Young LLP
23
.2*
Consent of Pepper Hamilton LLP (included in Exhibit 5.1)
24
.1
Power of Attorney (set forth on the signature page to this
    registration statement)
*
To be filed by amendment.