<HTML>
<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;25, 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: 10pt;">
<HR size="4" noshade color="#000000" style="margin-top: -5px">
</DIV>

<DIV align="center" style="font-size: 10pt;">
<HR size="1" noshade color="#000000" style="margin-top: -10px">
</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>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: 27%; 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: 24pt;">
<B>ADAMS LABORATORIES, 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="34%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="28%">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B>Texas<BR>
     </B><I>(State or Other Jurisdiction of<BR>
     Incorporation or Organization)</I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>2834<BR>
     </B><I>(Primary Standard Industrial<BR>
     Classification Code Number)</I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>75-2725552<BR>
     </B><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: 27%; 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>425 Main Street</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Chester, New Jersey 07930</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(908)&nbsp;879-1400</B>
</DIV>

<DIV align="center" style="font-size: 8pt;">
<I>(Address, including zip code, and telephone number,
including</I>
</DIV>

<DIV align="center" style="font-size: 8pt;">
<I>area code, of registrant&#146;s principal executive
offices)</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: 27%; 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>Walter E. Riehemann,&nbsp;Esq.</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Vice President&nbsp;&#38; General Counsel</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>425 Main Street</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Chester, New Jersey 07930</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(908)&nbsp;879-1400</B>
</DIV>

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

<DIV align="center" style="font-size: 8pt;">
<I>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: 27%; 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>Copies of Communications to:</I></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="55%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="42%">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B>J. Vaughan Curtis<BR>
    J. Mark Ray<BR>
    Alston&nbsp;&#38; Bird LLP<BR>
    One Atlantic Center<BR>
    1201 West Peachtree Street<BR>
    Atlanta, Georgia 30309<BR>
    (404) 881-7000</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>Patrick O&#146;Brien<BR>
    Ropes&nbsp;&#38; Gray LLP<BR>
    One International Place<BR>
    Boston, Massachusetts 02110<BR>
    (617) 951-7000</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: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Approximate date of commencement of proposed sale to the
public:</B> As soon as practicable after the effective date of
this registration statement.
</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: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
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, as amended,
check the following
box.&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
If this Form is filed to register additional securities for an
offering pursuant to Rule&nbsp;462(b) 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: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
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: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
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: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
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: 3pt; ">

<TR style="font-size: 1pt;">
    <TD width="56%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
    <TD width="2%">&nbsp;</TD>
    <TD width="16%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
    <TD width="2%">&nbsp;</TD>
    <TD width="20%">&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;">&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>
</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>
</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>&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>Aggregate Offering</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Amount of</B></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>Price(1)</B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Registration Fee(1)</B></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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common Stock, $0.01&nbsp;par value per share</DIV>
    </TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $125,000,000</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $14,713</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>

</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>

</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: 10pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Estimated pursuant to Rule&nbsp;457(o) of the Securities Act of
    1933, as amended, solely for purposes of calculating the
    registration fee.</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: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<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 of 1933 or until this 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: 10pt; margin-top: 8pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<HR size="1" noshade color="#000000" style="margin-top: -2px">
</DIV>

<DIV align="center" style="font-size: 10pt;">
<HR size="4" noshade color="#000000" style="margin-top: -10px">
</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>
<FONT color="#E8112D" face="helvetica,arial">The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not
permitted.</FONT><FONT face="helvetica,arial"> <BR>


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

<DIV align="left" style="font-size: 10pt; margin-top: 1pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
PROSPECTUS <B><FONT color="#E8112D">(Subject to
Completion)</FONT></B>
</DIV>

<DIV align="left" style="font-size: 10pt;">
<B>Issued &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005</B>
</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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shares</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<IMG src="y06044y0604400.gif" alt="Adams Laboratories, Inc.">
</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>ADAMS LABORATORIES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Common Stock</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: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This offering is our initial public offering of shares of our
common stock. We are
offering &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 the selling stockholders are
offering &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. We will not receive any of the proceeds from
the sale of shares of common stock by the selling stockholders.
</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: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We expect the initial public offering price to be between
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. Currently, no public market exists for our shares. We
intend to apply to have our common stock quoted on the Nasdaq
National Market under the symbol &#147;ARxT&#148;.
</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: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 12pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>Investing in our common stock involves risks. See &#147;Risk
Factors&#148; beginning on page&nbsp;7.</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: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</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="66%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="20%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Per Share</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Total</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</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>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Public offering price</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Underwriting discount</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $</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="center" valign="bottom">
    $</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds, before expenses, to the selling stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    $</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;&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
of common stock from us at the public offering price, less the
underwriting discount, within 30&nbsp;days from the date of this
prospectus to cover over-allotments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters expect to deliver the shares to purchasers 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: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</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: 18pt;">

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

<TR valign="top">
    <TD align="left"><B>Merrill Lynch&nbsp;&#38; Co.</B></TD>
    <TD align="right"><B>Morgan Stanley</B></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: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</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: 18pt;">

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

<TR valign="top">
    <TD align="left"><B>Deutsche Bank Securities</B></TD>
    <TD align="right"><B>RBC Capital Markets</B></TD>
</TR>

</TABLE>

<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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005.
</DIV>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">



<P align="center" style="font-size: 10pt"><IMG src="y06044y0604498.jpg" alt="()">


<TABLE width="90%">
<TR><TD style="font-size: 1pt; color: #FFFFFF"><B>Congested?</B>
Show MUCUS the way out.
When mucus settles into your chest, it&#146;s tough to get it out. That&#146;s when you need
Mucinex<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>. Only Mucinex has a dual-release formula that is specially made to loosen, thin
out, and break up the mucus that causes congestion. Just one pill lasts up to 12 hours. Plus, you
don&#146;t have to mess with sticky syrups. Next time you&#146;re congested with mucus that doesn&#146;t want to
leave, show it the door with Mucinex.
&#169; Copyright 2004. Adams Respiratory Therapeutics. Use as directed.
Visit www.mucinex.com</TD>
</TR>
</TABLE>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

<!-- 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; margin-top: 12pt; ">

<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="top">&nbsp;</TD>
    <TD align="right" valign="top" 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="top">&nbsp;</TD>
    <TD align="right" valign="top" 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'>Cautionary Note Regarding Forward-Looking
    Statements</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>22</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="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23</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="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>23</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="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>24</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="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>25</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#108'>Selected Financial Data</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>27</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="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>29</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#110'>Market, Ranking and Other Data</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>42</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#111'>Business</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>43</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#112'>Management and Board of Directors</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>58</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#113'>Principal and Selling Stockholders</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>70</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#114'>Certain Relationships and Related Party
    Transactions</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>73</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#115'>Description of Capital Stock</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>75</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#116'>Shares Eligible for Future Sale</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>80</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#117'>Federal Income Tax Consequences to
    Non-U.S.&nbsp;Holders of Common Stock</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>83</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#118'>Underwriting</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>86</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#119'>Legal Matters</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>89</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#120'>Experts</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>89</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#121'>Where You Can Find More Information</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>89</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#122'>Index to Financial Statements</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>F-1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv4w3.txt">AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv4w4.txt">SERIES C PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w1.txt">LEASE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w2.txt">ASSET PURCHASE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w3.txt">EXCLUSIVE DISTRIBUTION AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w4.txt">SUPPLY AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w5.txt">COMMERCIAL SERVICES AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w6.txt">1999 LONG-TERM INCENTIVE PLAN</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w7.txt">FORM OF AWARD</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w10.txt">RETIREMENT SAVINGS PLAN</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w11.txt">EMPLOYMENT AGREEMENT WITH MICHAEL J. VALENTINO</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w12.txt">INCOME SECURITY AGREEMENT WITH DAVID P. BECKER</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w13.txt">INCOME SECURITY AGREEMENT WITH JOHN THIEVON</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w14.txt">INCOME SECURITY AGREEMENT WITH ROBERT CASALE</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w15.txt">INCOME SECURITY AGREEMENT WITH WALTER E. RIEHEMANN</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w16.txt">INCOME SECURITY AGREEMENT WITH HELMUT H. ALBRECHT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv10w17.txt">INCOME SECURITY AGREEMENT WITH SUSAN WITHAM</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="y06044exv23w2.txt">CONSENT OF ERNST & YOUNG LLP</A></FONT></TD></TR>
</TABLE>
</CENTER>

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

<DIV align="center" style="font-size: 3pt; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</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;
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus.
This prospectus may be used only where it is legal to sell these
securities. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the
front of 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;&nbsp;&nbsp;&nbsp;&nbsp;
For investors outside the United States: Neither we nor any of
the underwriters have done anything that would permit this
offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States. You are required to inform yourselves
about and to observe any restrictions relating to this offering
and the distribution of this prospectus.
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>The following is a summary of selected information contained
elsewhere in this prospectus. It does not contain all of the
information that you should consider before buying shares of our
common stock. You should read this entire prospectus carefully,
especially the section entitled &#147;Risk Factors&#148; and the
financial statements and the notes to the financial statements
at the end of the prospectus. References in this prospectus to
&#147;we,&#148; &#147;us,&#148; &#147;our&#148; or the
&#147;Company,&#148; unless the context requires otherwise,
refer to Adams Laboratories, Inc.</I>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Adams Laboratories, Inc.</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>Our 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;&nbsp;&nbsp;&nbsp;&nbsp;
We are a specialty pharmaceutical company focused on the
late-stage development, <BR>
 commercialization and marketing of over-the-counter, or OTC,
and prescription pharmaceuticals for the treatment of
respiratory disorders. We currently market two OTC products
under our Mucinex brand and expect to launch four additional
products that are already approved by the U.S.&nbsp;Food and
Drug Administration, or the FDA, over the next two 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;&nbsp;&nbsp;&nbsp;&nbsp;
For the fiscal year ended June&nbsp;30, 2004, our revenues were
$61.3&nbsp;million and our net income was $35.8&nbsp;million
(including a tax benefit of $16.1&nbsp;million related primarily
to the future benefit of our net operating loss), representing a
337% growth in revenues over the fiscal year ended June&nbsp;30,
2003. For the six months ended December&nbsp;31, 2004, our
revenues were $62.0&nbsp;million and our net income was
$9.2&nbsp;million, representing a 129% increase in revenues over
the six months ended 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;&nbsp;&nbsp;&nbsp;&nbsp;
Mucinex, our single-ingredient product that we refer to as
Mucinex SE, is the only FDA-approved, long-acting,
single-ingredient guaifenesin product in the United States.
Guaifenesin is an expectorant that thins bronchial secretions
and makes coughs more productive. In accordance with FDA policy
to remove unapproved products from the market once a similar
product has been approved, all competitive long-acting,
single-ingredient guaifenesin products were removed from the
market in December 2003. Based on data from IMS Health
Incorporated-National Prescription Audit Plus Family of
Services<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">TM</FONT></SUP>,
or IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">TM</FONT></SUP>,
we estimate that, for the 12&nbsp;months ended June&nbsp;30,
2003, approximately 10.5&nbsp;million prescriptions were
dispensed for competing long-acting, single-ingredient
guaifenesin products. Mucinex SE is now the only product
available to meet this demand.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Mucinex DM, introduced in August 2004, is the only FDA-approved,
long-acting guaifenesin and dextromethorphan HBr (a cough
suppressant) combination product in the United States. Based on
IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">TM</FONT></SUP>
data, we estimate that, for the 12&nbsp;months ended
June&nbsp;30, 2003, approximately 3.0&nbsp;million prescriptions
were dispensed for long-acting guaifenesin and dextromethorphan
combination products in the United States. If the FDA removes
competitive products from the market under its policy, Mucinex
DM will be the only product available to meet this demand.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our four additional FDA-approved products, which we have not yet
launched, are Mucinex D, which combines long-acting guaifenesin
with the decongestant pseudoephedrine HCl, and three maximum
strength guaifenesin-based products. Each of these products is
the only FDA-approved product of its kind. We expect to launch
Mucinex D and our maximum strength, single-ingredient
guaifenesin product (under the Humibid brand name) in the first
quarter of 2006 and our remaining maximum strength formulations
in the second 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;&nbsp;&nbsp;&nbsp;&nbsp;
All of our products incorporate our patented delivery system for
guaifenesin. Our delivery system has an immediate release
component that provides rapid relief from excess mucus and an
extended-release component that provides a long-lasting effect
for up to 12&nbsp;hours. Utilizing this technology, we are
currently developing three additional products combining
long-acting guaifenesin with other active ingredients.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The U.S. retail market for OTC cough, cold, allergy, and sinus
products is approximately $2.6&nbsp;billion according to
Information Resources, Inc., or IRI, for the 52 weeks ended
January&nbsp;23, 2005.
</DIV>
</DIV>

<P align="center" style="font-size: 10pt;">1
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<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<DIV align="left" style="font-size: 10pt;">
The U.S.&nbsp;market for prescription cough and cold products
was approximately $1.3&nbsp;billion in 2004 according to
IMS&nbsp;Health Incorporated&#150;National Sales
Perspectives<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">TM</FONT></SUP>,
or IMS Health&#150;National Sales
Perspectives<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">TM</FONT></SUP>.
We believe that our current products and products in development
or being considered for development will compete in many of the
segments included in this combined OTC and prescription market
that totals approximately $3.9&nbsp;billion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We employ a dual marketing approach to take advantage of the
former prescription nature of the long-acting guaifenesin market
and the OTC opportunity. Our 100-person professional sales force
educates physicians on the benefits of long-acting guaifenesin
products and encourages these physicians to recommend our
products to their patients. We launched a television, print and
radio advertising campaign to build awareness of the Mucinex
brand in the consumer market in November 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;&nbsp;&nbsp;&nbsp;&nbsp;
According to IRI, for the 52-week period ended January&nbsp;23,
2005, Mucinex was the seventh best-selling brand of the 168
brands in the cough, cold, allergy, and sinus market based on
retail dollar sales. Based on research we sponsored, aided brand
awareness of Mucinex has increased from 14% prior to the launch
of our advertising campaign in November 2004 to 55% for the four
weeks ended March&nbsp;5, 2005. In addition, in June 2004,
Mucinex SE was recognized by NACDS Marketplace as the best new
product in the &#147;Healthcare/ OTC&#148; category. Later in
2004, Mucinex SE was voted the&nbsp;#1 new product in the
&#147;Cough/ Cold/ Allergy&#148; category at the Retail
Excellence Awards hosted by Drug Store News.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our goal is to be a leading specialty pharmaceutical company
with a focus on respiratory therapeutics by building
market-leading brands in the OTC and prescription pharmaceutical
markets. The key elements of our strategy to achieve this goal
are to:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Continue to Switch Prescriptions for Long-Acting Guaifenesin
    into Sales of Our Products.</I> Despite the removal of all
    competing long-acting, single-ingredient guaifenesin products
    from the U.S.&nbsp;market, physicians continue to write
    prescriptions for these products. In order to convert these and
    prescriptions for long-acting guaifenesin and dextromethorphan
    combination products into sales of Mucinex SE and Mucinex DM,
    respectively, our 100-person professional sales force details
    our Mucinex products to physicians and encourages them to write
    recommendations for our products.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Expand the Market by Educating Healthcare Professionals About
    the Benefits of Long-Acting Guaifenesin.</I> Because the
    prescription market for long-acting guaifenesin historically
    consisted primarily of generic products, physicians, pharmacists
    and other healthcare professionals were not regularly detailed
    about the benefits of long-acting guaifenesin. Our sales force
    seeks to educate these professionals as to the therapeutic value
    of long-acting guaifenesin in an effort to expand the market for
    our current and future products.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Build the Mucinex Brand in the Consumer Market.</I> While
    guaifenesin in short-acting (immediate release) formulations is
    a common ingredient in numerous OTC cough, cold and sinus
    remedies, prior to the FDA&#146;s approval of Mucinex SE as an
    OTC drug, long-acting guaifenesin was only available by
    prescription. Our consumer advertising strategy is to educate
    consumers about the unique benefits of Mucinex to encourage
    trial of our products. We believe that this campaign will expand
    consumer awareness of Mucinex and create a sustainable brand.
    Our current advertising campaign features an animated character
    called &#147;Mr.&nbsp;Mucus&#148; and the tag-line &#147;Mucinex
    In, Mucus Out.&#148;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Launch New Products Under Our Existing Brands.</I> We seek to
    capture a larger share of the OTC cough, cold, allergy, and
    sinus market by launching new products under our Mucinex and
    Humibid brands. Our first three line extensions are Mucinex DM,
    Mucinex D and Humibid, all of which incorporate our patented
    technology for long-acting guaifenesin.</TD>
</TR>

</TABLE>
</DIV>

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

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<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<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="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Develop Prescription Respiratory Products.</I> By applying
    our patented technology, we plan to develop products that
    combine long-acting guaifenesin with prescription active
    ingredients. We intend to use this strategy to enter
    prescription respiratory market segments. We are currently
    considering a number of product candidates for the prescription
    market. We will use our existing professional sales force to
    market these products to the physicians we currently target.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Continue to In-License or Acquire Respiratory Products and
    Brands.</I> We intend to expand our product portfolio by
    selectively in-licensing and acquiring prescription or OTC
    products or brands in the respiratory market. For example, we
    recently acquired the Humibid brand. We will focus on
    prescription products in the later stages of development and OTC
    brands that we believe can be expanded in the cough, cold,
    allergy, and sinus market. In addition, we are evaluating
    licensing respiratory prescription products available outside
    the United States and may seek FDA approval to introduce them in
    the U.S.&nbsp;market.</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>Company 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;&nbsp;&nbsp;&nbsp;&nbsp;
Our principal executive offices are located at 425&nbsp;Main
Street, Chester, New Jersey 07930, and our telephone number is
(908)&nbsp;879-1400. Our website address is
<U>www.adamsrt.com</U>. The information on our website is not a
part of this prospectus. We have included our website address in
this document as an inactive textual reference only. Adams, <I>A
</I>Adams Respiratory Therapeutics, Humibid, Mucinex and
Mr.&nbsp;Mucus are our registered trademarks or are the subject
of pending trademark applications. Each of the other trademarks,
trade names or service marks of other companies appearing in
this prospectus is the property of its respective owner.
</DIV>
</DIV>

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

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<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<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>

<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="49%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="48%">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock offered by us:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock offered by the selling stockholders:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock to be outstanding immediately after this offering:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Use of proceeds:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    We estimate that our net proceeds from this offering will be
    approximately $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million at an
    assumed initial public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per share, after deducting the
    estimated underwriting discount and commissions and offering
    expenses. We expect to use the net proceeds from this offering
    to continue to build the Mucinex brand, fund product development
    and for general corporate purposes. See &#147;Use of
    Proceeds.&#148;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    We will not receive any proceeds from the sale of shares of
    common stock by the selling stockholders.</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proposed Nasdaq National Market Symbol:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    ARxT</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;&nbsp;&nbsp;&nbsp;&nbsp;
The number of shares of common stock to be outstanding
immediately after the offering is based
on &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 outstanding as
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
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;&nbsp;&nbsp;&nbsp;&nbsp;
The number of shares of common stock to be outstanding after
this offering does not take into account:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    10,223,480&nbsp;shares of common stock issuable upon the
    exercise of stock options outstanding as of February&nbsp;28,
    2005 with a weighted average exercise price of $0.69&nbsp;per
    share;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    9,561,971&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants as of February&nbsp;28, 2005 with a
    weighted average exercise price of $0.61&nbsp;per share;&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">
    an aggregate of 1,276,520&nbsp;shares of common stock reserved
    for future issuance under our equity incentive plans as of the
    completion of 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;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, except as otherwise noted, all information in this
prospectus:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    assumes the underwriters do not exercise their over-allotment
    option;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    gives effect to our reincorporation in the State of Delaware,
    which will occur prior to the closing of this offering;&nbsp;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    assumes the conversion of our preferred stock into 48,055,162
    shares of our common stock; and</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    gives effect to
    a &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-for-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;reverse
    stock split of outstanding shares of our common stock, which
    will occur prior to the completion of this offering in
    connection with our reincorporation in the State of Delaware.</TD>
</TR>

</TABLE>
</DIV>

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

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<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;&nbsp;&nbsp;&nbsp;&nbsp;
Set forth below is our summary financial data, in each case, at
the dates and for the periods indicated. The summary financial
information set forth below as of and for the years ended
June&nbsp;30, 2004, 2003 and 2002 has been derived from our
audited financial statements and the summary financial
information as of and for the six months ended December&nbsp;31,
2004 and 2003 has been derived from our unaudited financial
statements, in each case, included elsewhere in this prospectus.
The unaudited financial statements include, in the opinion of
management, all adjustments, consisting of normal recurring
accruals that management considers necessary for a fair
presentation of the financial information set forth in those
statements. Results of operations for the interim periods are
not necessarily indicative of the results that might be expected
for any other interim period or for an entire period.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The as adjusted balance sheet data gives effect to (a)&nbsp;the
issuance and sale
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 after deducting the
underwriting discount and commissions and estimated offering
expenses payable by us at an assumed initial public offering
price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, which is the mid-point of the estimated offering price
range on the cover of this prospectus and (b)&nbsp;the
conversion of all our outstanding preferred stock into an
aggregate of 48,055,162&nbsp;shares of common stock upon
completion of 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;&nbsp;&nbsp;&nbsp;&nbsp;
You should read this summary financial data together with our
financial statements and the related notes and the section of
this prospectus entitled &#147;Management&#146;s Discussion and
Analysis of Financial Condition and Results of Operations.&#148;
</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="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="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="4%">&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="6" align="center" nowrap><B>Six Months Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&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>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Years Ended June&nbsp;30,</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>
    <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>2004</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>
    <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>2002</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>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</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>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>(in thousands, except per share amounts)</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">
    <B>Statements of Operations 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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>62,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>27,074</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>61,295</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>14,038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>13,755</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">
    Cost of goods sold</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,049</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,928</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,252</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,024</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross margin</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48,671</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,025</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,367</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,786</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,731</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">
    Selling, marketing and administrative(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,768</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,968</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Product development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,719</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,419</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">
    Interest expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>52</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,582</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,601</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">
    Interest income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(294</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(52</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</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</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(180</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income/(loss) before income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,086</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,702</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(22,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,476</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">
    Provision/(benefit) for income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,858</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>(16,124</TD>
    <TD align="left" valign="bottom" nowrap>)</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 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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income/(loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35,826</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(22,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,476</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accretion of preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,953</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(320</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(590</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(627</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(619</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net (loss)/income applicable to common stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,725</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>8,622</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>35,236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(23,265</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(16,095</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    (Loss)/earnings per common 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">&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">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.64</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.83</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>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1.43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.64</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.83</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma earnings per common share(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>&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">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.58</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">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.49</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: 15%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</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">
    Selling, marketing and administrative expenses includes non-cash
    stock-based compensation expense as follows:</TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9pt; margin-top: 3pt; ">

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

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>179</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>343</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>686</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,292</TD>
    <TD>&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>(2)&nbsp;</TD>
    <TD align="left">
    Please see Note&nbsp;1 to our financial statements for an
    explanation of the method used to compute pro forma earnings per
    common share, basic and diluted, and the number of shares used
    in computing per share amounts.</TD>
</TR>

</TABLE>
</DIV>

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

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

<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="71%">&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="3%">&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>At December&nbsp;31, 2004</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>Actual</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>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(in thousands)</B></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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash, cash equivalents and short-term investments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>36,720</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">
    Working capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>55,106</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>85,977</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 liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,516</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>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable convertible preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>236,429</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">
    Accumulated deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(20,653</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">
    Total stockholders&#146; (deficit) equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(172,997</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>

</TABLE>
</CENTER>
</DIV>

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

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<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='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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Buying shares of our common stock involves risk. You should
consider carefully the risks and uncertainties described below,
together with all of the other information in this prospectus,
including the financial statements and the related notes
appearing at the end of this prospectus, before deciding to
purchase shares of our common stock.</I>
</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>Risks Relating to Our Business</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>We depend heavily on the success of our existing products,
    Mucinex SE and Mucinex DM, and the strength of the Mucinex
    brand. If we are unable to continue to successfully
    commercialize our two current products and build the Mucinex
    brand, our results of operations and future prospects will
    suffer.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Mucinex SE and Mucinex DM are currently our only commercial
products. Sales of Mucinex SE accounted for approximately 86% of
our revenue in fiscal 2004 and approximately 76% of our revenue
for the first half of fiscal 2005. Sales of Mucinex DM accounted
for approximately 19% of our revenue in the first half of fiscal
2005. Within the next year we intend to launch Mucinex D, a
product combining long-acting guaifenesin with pseudoephedrine.
We anticipate that in the near term our ability to generate
revenues and establish our Mucinex brand will depend largely on
the continued success of Mucinex SE and Mucinex DM and the
successful commercialization of additional products that utilize
the Mucinex brand name. The extent of the commercial success of
our current Mucinex products will depend on several factors,
including 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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    expanding our manufacturing capacity with Cardinal Health, Inc.;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    finding and qualifying alternative sources for our active and
    inactive pharmaceutical ingredients;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    our ability to supply sufficient product to meet the demand of
    our customers;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    launching commercial sales of Mucinex D and additional products
    in the future;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    acceptance of long-acting guaifenesin products in the physician,
    pharmacist and consumer communities;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    success of our consumer advertising and marketing campaigns;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    whether the FDA takes action to enforce the removal of
    unapproved drugs similar to Mucinex DM and Mucinex D from the
    market;&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">
    our ability to sustain and grow market share relative to OTC and
    prescription cough, cold, allergy, and sinus remedies.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Any failure or delay in our efforts to successfully
commercialize our products could have a negative impact on our
revenues and ability to execute our business strategy.
</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>We do not have our own manufacturing capability and rely
    on Cardinal Health to manufacture Mucinex SE and Mucinex DM at a
    single facility. Pursuant to our agreement with Cardinal Health,
    we have agreed to use Cardinal Health as the exclusive
    manufacturer of Mucinex&nbsp;SE and Mucinex&nbsp;DM, as well as
    additional products we develop. If Cardinal Health fails to meet
    our requirements, our commercialization efforts 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;&nbsp;&nbsp;&nbsp;&nbsp;
We do not have our own manufacturing capability and currently
rely on a single third party to manufacture Mucinex SE, Mucinex
DM and future products that we develop. We have an exclusive
arrangement with Cardinal Health for the manufacture of our
products. For a ten-year term beginning April 2004, we agreed to
use Cardinal Health as the exclusive manufacturer of our current
products and all of our future drug products, unless Cardinal
Health is unable to manufacture such products or unable to
obtain the means to do so within a reasonable timeframe. As a
result of this arrangement, we are
</DIV>

<P align="center" style="font-size: 10pt;">7

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

<DIV align="left" style="font-size: 10pt;">
unable to diversify our manufacturing sources and are vulnerable
to any interruptions in our supply from Cardinal Health.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, Cardinal Health currently manufactures Mucinex SE
and Mucinex DM at a single dedicated facility that has been
unable to supply sufficient quantities to meet the demand for
these products. At February&nbsp;28, 2005, we had open orders
for our products of approximately $16&nbsp;million. We are
working with Cardinal Health to obtain the necessary additional
manufacturing capacity by having Cardinal Health install
additional manufacturing lines at the existing, dedicated
facility and qualifying with the FDA a second Cardinal Health
facility to manufacture our products. If we are unable to
increase the manufacturing capacity, or unable to obtain the
additional capacity on reasonable economic terms, we may not be
able to produce our products in sufficient quantities to meet
the demand, which could negatively impact our revenues and
operating results. The addition of such capacity on unfavorable
terms could also affect our revenue and profitability. In
addition, any damage to, or disruption at, Cardinal
Health&#146;s facility could halt production of our products and
materially harm our business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to continue to rely on third parties to manufacture
our products. Reliance on third party manufacturers entails
risks to which we would not be subject if we manufactured
products ourselves, 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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the possibility that third parties may not comply with the
    FDA&#146;s current Good Manufacturing Practices, or cGMP,
    regulations, other regulatory requirements and quality assurance;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the possible breach of manufacturing agreements by third parties
    due to factors beyond our control;&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 possibility of termination or nonrenewal of an agreement by
    a third party, based on their own business priorities, at a time
    that is costly or inconvenient for 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;&nbsp;&nbsp;&nbsp;&nbsp;
In the event of a supply disruption or a deterioration in our
product quality from a third party manufacturer, we would need
to rely on alternative manufacturing sources or identify and
qualify new manufacturers. We may not be able to identify or
qualify such manufacturers in a timely manner or obtain a
sufficient allocation of their capacity to meet our
requirements. In addition, alternative vendors must comply with
product validation and stability testing, which may involve
additional manufacturing expense, or delay in production or
regulatory approvals. The consequence of any resulting delays in
meeting demand could negatively impact our inventory levels,
sales, profitability, and reputation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have the ability under our supply agreement with Cardinal
Health to repurchase the Fort&nbsp;Worth, Texas manufacturing
facility. This repurchase may disrupt supply of our products,
would involve a substantial amount of time and money to complete
and could distract our senior management from the day-to-day
operations of our business.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>We and Cardinal Health depend on a single supplier for
    guaifenesin, the active ingredient in our Mucinex product line,
    and our current supplier for dextromethorphan, the additional
    active ingredient in Mucinex DM, is exiting the 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;&nbsp;&nbsp;&nbsp;&nbsp;
Currently, Cardinal Health obtains all of the guaifenesin for
our products, the active ingredient in our Mucinex product line,
from a single supplier, Boehringer Ingelheim Chemicals, Inc.
According to Cardinal Health&#146;s agreement with Boehringer
Ingelheim, which lasts through June 2006, Cardinal Health must
purchase from Boehringer Ingelheim all of the guaifenesin used
in Mucinex SE and at least 90% of the guaifenesin used in our
products produced under all subsequent new drug applications, or
NDAs. Under certain circumstances, Boehringer Ingelheim is
entitled to adjust the prices Cardinal Health pays upon written
notice. Boehringer Ingelheim is currently qualifying a second
dryer for guaifenesin. If Boehringer Ingelheim is unable to
increase manufacturing capacity, they will not be able to meet
our demand for guaifenesin.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
The supplier from whom Cardinal Health has historically obtained
dextromethorphan, the additional active ingredient in Mucinex
DM, reduced their production of this substance in 2004. Cardinal
Health was able to obtain an additional supply of
dextromethorphan, which we expect will meet our needs through
December 2006. Cardinal Health has not qualified an alternative
supplier for dextromethorphan, and if an alternative supplier
for dextromethorphan is not qualified prior to the depletion of
the existing supply of dextromethorphan, which could be prior to
2006, we will not be able to supply Mucinex&nbsp;DM.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The FDA requires that all manufacturers of pharmaceutical
ingredients for sale in, or from, the United States achieve and
maintain compliance with the cGMP regulations and guidelines.
There are a limited number of manufacturers operating under cGMP
regulations that are capable of manufacturing either guaifenesin
or dextromethorphan. We do not currently have alternative
sources for production of either ingredient, and Cardinal Health
has a limited ability to enter into relationships with
alternative guaifenesin suppliers without terminating its
agreement with Boehringer Ingelheim. Cardinal Health may be
unable to utilize alternative manufacturing sources for these
ingredients or to obtain such manufacturing on commercially
reasonable terms or on a timely basis. Any transfer of Cardinal
Health&#146;s sources of supply to other manufacturers will
require the satisfaction of various regulatory requirements,
which could cause Cardinal Health to experience significant
delays in receiving adequate supplies of guaifenesin,
dextromethorphan or both. Any delays in the manufacturing
process may adversely impact our ability to meet commercial
demand on a timely basis, which would negatively impact our
revenues, reputation and business strategy.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>We cannot ensure that the FDA will enforce removal from
    the market of the existing prescription long-acting guaifenesin
    combination products similar to Mucinex&nbsp;DM and
    Mucinex&nbsp;D, and we cannot ensure that products containing
    long-acting guaifenesin that are competitive with our products
    will not be introduced into the OTC market.</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;&nbsp;&nbsp;&nbsp;&nbsp;
As described more fully under the section entitled
&#147;Government Regulation,&#148; following its approval of
Mucinex SE, the FDA took enforcement action to remove all
existing long-acting, single-ingredient guaifenesin
single-entity products from the market. We believe that sales of
Mucinex SE increased as a result of the FDA&#146;s action and
its resulting status as the only drug of its kind to be approved
by the FDA for marketing and sale in the United States. The FDA
approved Mucinex DM in April 2004 and Mucinex D in June 2004. As
of the date of this prospectus, the FDA has not taken any action
to remove from the market existing, long-acting guaifenesin and
dextromethorphan combination products, which are similar to
Mucinex DM, and existing, long-acting guaifenesin and
pseudoephedrine combination products, which are similar to
Mucinex D. We have no assurance that the FDA will ever undertake
this action and we may never achieve the increase in sales we
would anticipate if the FDA removed these competing, unapproved
products from the market.
</DIV>

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In addition, as described more fully under the section entitled
&#147;Government Regulation,&#148; based on our patent position
and regulatory requirements, we estimate that the process of
developing and obtaining the necessary FDA approvals for
competitive long-acting guaifenesin products would take two to
three years from the start of this process. However, it is
possible that competitors have already begun the process of
developing and obtaining FDA approval for products competitive
with Mucinex&nbsp;SE or our other products. As a result, we
cannot be sure that the effective market exclusivity that we
currently enjoy for Mucinex&nbsp;SE, and would enjoy if the FDA
removes from the market products similar to Mucinex&nbsp;DM or
Mucinex&nbsp;D, will continue for any period of time into the
future. If competitive long-acting guaifenesin OTC products are
approved, our growth may be slowed or our results of operations
may be adversely affected.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>Our products and all of our product candidates rely on
    guaifenesin, which is an expectorant. If our competitors develop
    a superior expectorant, our products and our patented technology
    may be rendered obsolete.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Guaifenesin is a fundamental component in all of our currently
marketed products and product candidates. Guaifenesin and the
other active ingredients in our products and product candidates
have been
</DIV>

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used for many years. Our competitors may develop new chemicals
or compounds that render guaifenesin, our patented delivery
system or our products obsolete. We can offer no assurance that
our development efforts will be able to lead or keep pace with
discoveries or technological advances that yield superior
compounds or products, or that we will recover our investment in
our products before any such advancements render them obsolete.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>We depend on a limited number of customers for a large
    portion of our sales and demands made by, or the loss of, one or
    more of these customers could significantly reduce our margins
    or sales and adversely affect our business and financial
    results.</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;&nbsp;&nbsp;&nbsp;&nbsp;
For the six months ended December&nbsp;31, 2004, our top five
and ten customers accounted for an aggregate of approximately
63% and 82% of our gross sales, respectively. CVS, McKesson
Corporation, Walgreens, and Wal-Mart each accounted for greater
than 10% of our gross sales for the six months ended
December&nbsp;31, 2004. We expect that, for the year ended
June&nbsp;30, 2005 and future periods, our top five and ten
customers will, in the aggregate, continue to account for a
large portion of our sales. In addition, retailers have
demanded, and may continue to demand, increased service and
other accommodations, as well as price concessions. As a result,
we may face downward pressure on our prices and increased
expenses to meet these demands, which would reduce our margins.
Given the growing trend toward consolidation of retailers, we
expect demands by customers and the concentration of our sales
in a small number of customers to increase. The loss of one or
more of our top customers, any significant decrease in sales to
these customers, pricing concessions or other demands made by
these customers, or any significant decrease in our retail
display space in any of these customers&#146; stores could
reduce our sales and margins 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 substantial competition that may prevent us from
    maintaining or increasing market share for our existing products
    and gaining market acceptance of our future products. Our
    competitors may develop or commercialize products 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;&nbsp;&nbsp;&nbsp;&nbsp;
Our competitors may develop products that are superior to ours
or may more effectively market products that are competitive
with ours. We believe that Mucinex SE and Mucinex DM compete
primarily with products with strong brand awareness marketed by
large pharmaceutical companies such as:
</DIV>

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<TR>
    <TD width="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Pfizer, Inc. (Sudafed&#174; and Benadryl&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    The Procter&nbsp;&#38; Gamble Company (Dayquil&#174; and
    Nyquil&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    McNeil PPC, Inc., an operating company of Johnson&nbsp;&#38;
    Johnson (Tylenol Cold and Flu&#174; and Motrin Cold and
    Sinus&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Wyeth (Robitussin&#174;, Dimetapp&#174; and Advil Cold and
    Sinus&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Novartis AG (Theraflu&#174; and Triaminic&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Schering&#150;Plough Corp. (Claritin&#174;, Coricidin&#174; and
    Drixoral&#174;);&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">
    Bayer AG (Alka Seltzer Plus Cold&#174; and Aleve Cold and
    Sinus&#174;).</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;&nbsp;&nbsp;&nbsp;&nbsp;
We also face substantial competition from companies that market
private label brands to our largest customers, which are
typically sold at lower prices than our 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;&nbsp;&nbsp;&nbsp;&nbsp;
With respect to all of our existing and future drug products,
regardless of whether such products are sold by prescription or
OTC, we will compete with companies working to develop products
and technologies that are more effective, safer or less costly
than our products and technologies. Our competitors may also
obtain FDA or other regulatory approval for their products more
rapidly than us, have larger or more skilled sales forces to
promote their products and develop more comprehensive protection
for their technologies. Many of these competitors have
substantially greater financial, technical and human resources
than we do. Moreover, additional mergers and acquisitions in the
pharmaceutical industry may result in our competitors having an
even greater concentration of resources. We may not be
</DIV>

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able to maintain market acceptance of our products or
successfully introduce new products if our competitors develop
different or more advanced products, bring such products to
market before we do or market their products more effectively in
the OTC and prescription 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;&nbsp;&nbsp;&nbsp;&nbsp;
With respect to our Mucinex SE, Mucinex DM and our other future
OTC products, we also compete for brand recognition and product
availability at retail stores. In addition, we compete with our
competitors on price. Advertising, promotion, merchandising,
packaging, and the timing of new product introductions and line
extensions also have a significant impact on consumer buying
decisions and, as a result, on our sales. The large
pharmaceutical companies we compete against in the OTC market
have considerably greater financial resources than we do and
likely spend more on trade promotions and advertising. These
competitors also likely benefit from greater purchasing power,
stronger vendor relationships and broader distribution channels.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Sales of our products also affect in-store position, wall
display space and inventory levels in retail outlets. We have
not been able to supply sufficient quantities of Mucinex SE and
Mucinex DM to meet retail demand in recent months. If we are not
able to improve inventory levels of Mucinex SE or Mucinex DM,
maintain or improve in-store positioning of our products in
retail stores, conduct effective advertising campaigns and other
consumer and professional promotional programs, and maintain
distribution and supply arrangements on competitive terms, we
risk losing market share to our competitors in the OTC market.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>We have generated net income for a short time and may not
    generate net income 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;&nbsp;&nbsp;&nbsp;&nbsp;
We have generated net income for only five consecutive quarters
and the fiscal year ended June&nbsp;30, 2004 is the first year
we have shown net income. Our ability to maintain profitability
depends on our ability to generate revenue from existing
products and our ability to successfully develop, obtain
regulatory approval for, manufacture, and commercialize our
product candidates. Because of the numerous risks and
uncertainties associated with our business, we can offer no
assurance that we will continue to be profitable.
</DIV>

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    <TD width="3%"></TD>
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    <TD></TD>
    <TD>
    <B><I>Adverse publicity associated with us or our products could
    have a material adverse effect on 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;&nbsp;&nbsp;&nbsp;&nbsp;
We are highly dependent upon consumer perceptions of us, the
Mucinex brand and the safety and quality of our products. We
could be adversely affected if we or the Mucinex brand is
subject to negative publicity. We could also be adversely
affected if any of our products or any similar products
distributed by other companies prove to be, or are asserted to
be, harmful to consumers. Also, because of our dependence upon
consumer perceptions, any adverse publicity associated with
illness or other adverse effects resulting from consumers&#146;
use or misuse of our products or any similar products
distributed by other companies could have a material adverse
impact on our results of operations.
</DIV>

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    <TD width="3%"></TD>
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    <TD></TD>
    <TD>
    <B><I>Product liability lawsuits could divert our resources,
    result in substantial liabilities and reduce the commercial
    potential of 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;&nbsp;&nbsp;&nbsp;&nbsp;
Our business exposes us to the risk of product liability claims
that is inherent in the manufacturing, testing and marketing of
drugs and related products. These lawsuits may divert our
management from pursuing our business strategy and may be costly
to defend. In addition, if we are held liable in any of these
lawsuits, we may incur substantial liabilities and may be forced
to limit or forgo further commercialization of those products.
Although we maintain general liability and product liability
insurance, this insurance may not fully cover potential
liabilities. In addition, our inability to obtain or maintain
sufficient insurance coverage at an acceptable cost or to
otherwise protect against potential product liability claims
could prevent or inhibit the commercial production and sale of
our products, which could adversely affect our business.
</DIV>

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<B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
we fail to obtain an adequate level of reimbursement for our
products by Medicaid, our business may be adversely
affected.</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;&nbsp;&nbsp;&nbsp;&nbsp;
The availability and levels of reimbursement by Medicaid affect
the market for both our current and future products. Medicaid
continually attempts to contain or reduce the costs of
healthcare by challenging the prices charged for
pharmaceuticals. For example, we are obligated to provide
rebates to the state Medicaid programs on sales of our products
to Medicaid beneficiaries. We expect to experience pricing
pressures in connection with the sale of our current and future
products due to potential increases in rebates and other
downward trends in reimbursement aimed at reducing healthcare
costs and legislative proposals.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Medicaid does not generally cover the costs of OTC products.
Twenty-five state programs, however, have covered, and continue
to cover, the cost of long-acting guaifenesin products,
including our products. There is no assurance that any Medicaid
program will cover any of our new products or will continue to
cover our current products.
</DIV>

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    <TD></TD>
    <TD>
    <B><I>Seasonal fluctuations in demand for our current Mucinex
    products may cause our operating results to vary significantly
    from quarter to quarter.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Retail sales of our products have historically been concentrated
between October&nbsp;1 and March&nbsp;31 due to the prevalence
of respiratory congestion and cough during the cough, cold and
flu season. We generally ship products and recognize revenue in
the quarter prior to retail sales. In addition, fluctuations in
the severity of the annual cough, cold and flu season may cause
our operating results to vary from year to year. Due to these
seasonal fluctuations in demand, our operating results in any
particular quarter may not be indicative of the results for any
other quarter or for the entire 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>Risks Related to Product Development</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 width="3%"></TD>
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</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We may not be successful in our efforts to expand our
    portfolio of 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;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to expand our portfolio of products by:
</DIV>

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<TR>
    <TD width="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    developing and commercializing line extensions of Mucinex by
    combining long-acting guaifenesin with other ingredients to
    address various respiratory conditions;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    developing and commercializing prescription products to address
    additional segments of the respiratory market using our platform
    technology for extended-release guaifenesin;&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">
    acquiring or in-licensing additional technologies and additional
    pharmaceutical products or product candidates in the respiratory
    therapeutics market.</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;&nbsp;&nbsp;&nbsp;&nbsp;
These efforts may not be successful for a variety of reasons,
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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    we may not receive marketing approvals from the FDA for products
    currently under development or we may encounter unforeseen costs
    or delays in pursuing such approvals;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    our internal product development programs may not yield product
    candidates that are safe, effective and commercially viable;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    we may not be able to identify suitable technologies or products
    within our areas of expertise or we may not be able to acquire
    suitable technologies and products on commercially attractive
    terms;&nbsp;or</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    we will depend on third parties in the conduct of our clinical
    trials for future product candidates and these parties may fail
    to fulfill their obligations.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our failure to expand our portfolio of products in both the
prescription and OTC respiratory therapeutic markets, or any
unexpected delays in launching new products, will impair our
ability to execute our growth strategy, which will negatively
affect our financial position and results of operations.
</DIV>

<P align="center" style="font-size: 10pt;">12

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<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 intend to conduct clinical trials on product candidates
    we develop or acquire in the future, which will be costly, take
    years to complete and may not ultimately be successful.</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;&nbsp;&nbsp;&nbsp;&nbsp;
As part of our business strategy, we intend to pursue product
candidates that must undergo preclinical studies and clinical
trials as a condition to regulatory approval. Preclinical
studies and clinical trials are expensive and, because we do not
have the ability to conduct our own clinical trials, we will
hire third parties to run the trials, which will lessen our
control over the process. Clinical trials may take several years
to complete and may not be successful. The commencement and
completion of clinical trials may be delayed by many factors,
including:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    our inability to obtain materials sufficient for use in
    preclinical studies and clinical trials;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    delays in patient enrollment and variability in the number and
    types of patients available for clinical trials;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    difficulty in maintaining contact with patients after treatment,
    resulting in incomplete data;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    inability to demonstrate effectiveness of product candidates
    during clinical trials;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    unforeseen safety issues or side effects;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    governmental or regulatory delays and changes in regulatory
    requirements, policy and guidelines;&nbsp;or</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    varying interpretation of data 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;&nbsp;&nbsp;&nbsp;&nbsp;
Although we have not been required to conduct extensive clinical
trials to obtain FDA approval of our existing products, we
expect that many of our future product candidates may require
extensive clinical trials. We may not successfully complete
clinical trials for our product candidates. Accordingly, we may
not receive the regulatory approvals needed to market our
product candidates. Any failure or delay in commencing or
completing clinical trials or obtaining regulatory approvals for
our product candidates would delay or prevent the
commercialization of such product candidates, which could
negatively impact our financial position.
</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>Regulatory Risks</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>Products approved for marketing remain subject to
    regulation. Complying with such regulation can be costly and
    failure to comply could result in a loss of approvals or
    suspension 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;&nbsp;&nbsp;&nbsp;&nbsp;
We are subject to extensive regulation by the FDA and, to a
lesser extent, by other applicable federal agencies, such as the
Consumer Product Safety Commission, the Drug Enforcement
Administration, the Federal Trade Commission, or FTC, the
Environmental Protection Agency, and state government agencies.
The Federal Food, Drug and Cosmetic Act, the Controlled
Substances Act and other federal statutes and rules regulate the
testing, manufacture, packaging, labeling, storage, record
keeping, promotion, distribution, and sale of our products. If
we or our manufacturers fail to comply with those regulations,
we could become subject to significant penalties or claims,
which could materially and adversely affect our operating
results or our ability to conduct our business. In addition, the
adoption of new regulations or changes in the interpretations of
existing regulations may result in significant compliance costs
or discontinuation of product sales and may adversely affect our
revenue and the marketing of our 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;&nbsp;&nbsp;&nbsp;&nbsp;
In accordance with the Federal Food, Drug and Cosmetic Act and
FDA regulations, the manufacturing processes of our third party
manufacturers must also comply with cGMPs. The FDA inspects the
facilities of our third party manufacturers periodically to
determine if our third party manufacturers are complying with
cGMPs. The FDA may implement additional regulations with which
we would have to comply, which would increase our expenses.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
Additionally, if we or our third party manufacturers fail to
comply with federal or state regulations, we could be required
to:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

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

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

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

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    suspend the sale of products with non-complying specifications;</TD>
</TR>

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

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

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    change product labeling, packaging or advertising or take other
    corrective action.</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;">
Any of these actions could materially and adversely affect our
financial results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Further, our failure to comply with the FDA, FTC or state
regulations relating to our product claims and advertising may
result in enforcement actions and imposition of penalties or
otherwise materially and adversely affect our marketing strategy
and product sales.
</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 marketing approval for any of
    the products resulting from our development efforts and failure
    to obtain these approvals could 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;&nbsp;&nbsp;&nbsp;&nbsp;
All new medicines must be approved by the FDA before they can be
marketed and sold in the United States. Successfully completing
extensive clinical trials and demonstrating manufacturing
capability is typically required to obtain FDA approval, as
described more fully under &#147;Government Regulation.&#148;
Clinical development is expensive, uncertain and lengthy, often
taking a number of years for a NDA to be filed with and
ultimately approved by the FDA. Of the large number of drugs in
development, only a small percentage result in the submission of
a NDA to the FDA and even fewer are approved for
commercialization.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may need to successfully address a number of challenges in
order to complete the development of our future products. For
example, to obtain marketing approval for a new product
candidate, we and our third party manufacturers will be required
to consistently produce the active pharmaceutical ingredient in
commercial quantities and of specified quality on a repeated
basis. This requirement is referred to as process validation. If
we are unable to satisfy this process validation requirement for
a future product candidate, through our third party
manufacturers or otherwise, we will not receive approval to
market such 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;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, the FDA and other regulatory agencies may apply new
standards for safety, manufacturing, packaging, and distribution
of future product candidates. Complying with such standards may
be time consuming or expensive and could result in delays in our
obtaining marketing approval for future product candidates, or
possibly preclude us from obtaining such approval. Such a delay
could also increase our commercialization costs, possibly
materially.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Furthermore, our future products may not be effective or may
prove to have undesirable or unintended side effects, toxicities
or other characteristics that may preclude us from obtaining
regulatory approval or prevent or limit commercial use. The FDA
and other regulatory authorities may not approve any product
that we develop. Even if we do obtain regulatory approval, such
regulatory approvals may be subject to limitations on the
indicated uses for which we may market a product, which may
limit the size of the market for such product.
</DIV>

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The manufacture and packaging of pharmaceutical products
    such as our Mucinex product line are subject to the requirements
    of the FDA. If we or our third party manufacturers fail to
    satisfy these requirements, our product development and
    commercialization efforts 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;&nbsp;&nbsp;&nbsp;&nbsp;
As indicated above, an approved drug and its manufacturer are
subject to continual review, including review and approval of
the manufacturing facilities. Changes in the manufacturing
process or procedure, including a change in the location where
the product is manufactured or a change of a third party
manufacturer, may require prior FDA review or approval or
revalidation of the manufacturing
</DIV>

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process and procedures in accordance with cGMP. This review or
revalidation may be costly and time consuming and could delay or
prevent the launch or delivery of a product. To effect a change
of site, we and the manufacturer must transfer the relevant
manufacturing technology to the new site. This process is
detailed and time consuming. If we change the manufacturing
site, the FDA will likely require us to perform analytical tests
to demonstrate that changing the manufacturing location will not
affect the characteristics of the product. If we cannot
establish to the satisfaction of the FDA that the products
manufactured at the new site are equivalent to those
manufactured at the prior site, we may not obtain, or may be
delayed in obtaining, approval to manufacture our products at
the new site. In addition, if we elect to manufacture products
at the facility of another third party, we would need to ensure
that the new facility and the manufacturing process are in
compliance with cGMP. Any such new facility would be subject to
a preapproval inspection by the FDA.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Furthermore, in order to obtain approval by the FDA of new
products, we need to complete testing on both the active
pharmaceutical ingredient and on the finished product in the
packaging we propose for commercial sales. This testing includes
testing of stability, identification of impurities and testing
of other product specifications by validated test methods. If
the required testing is delayed or produces unfavorable results,
we may not obtain approval to launch the product or approval may
be delayed.
</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>If we or others identify side effects after our products
    are on the market, we may be required to withdraw our products
    from the market, perform lengthy additional clinical trials or
    change the labeling of our products, any of which would hinder
    or preclude our ability to generate revenues.</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;&nbsp;&nbsp;&nbsp;&nbsp;
If we or others identify side effects after any of our products
are on the market:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    regulatory authorities may withdraw their approvals;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    we may be required to reformulate our products, conduct
    additional clinical trials, change the labeling of our products,
    or implement changes to obtain new approvals of
    manufacturers&#146; facilities;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    we may recall the affected products from the market;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    we may experience a significant drop in sales of the affected
    products;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    our reputation in the marketplace may suffer;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    we may become the target of lawsuits, including class action
    suits;&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">
    we may be required to withdraw our products from the market and
    not be able to re-introduce them into the market.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Any of these events could harm or prevent sales of the affected
products or could substantially increase the costs and expenses
of commercializing or marketing these products.
</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 products are subject to recalls even after receiving
    FDA regulatory clearance or approval. Recalls could harm our
    reputation and 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;&nbsp;&nbsp;&nbsp;&nbsp;
We are subject to ongoing reporting regulations that require us
to report to the FDA if our products cause or contribute to a
death or serious injury. These reports can lead to stricter
safety warnings on product labeling, voluntary company recalls
or withdrawal of the product from the market. In addition, if we
become aware of adverse event reports, manufacturing defects or
insufficient labeling, we may voluntarily elect to recall one of
our products. Any recall, which must be reported to and
supervised by the FDA, would divert managerial and financial
resources and could harm our reputation with all of our
customers and with the health care professionals who recommend
our products, which may have a material adverse effect on our
business.
</DIV>

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

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<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>Mucinex D may be subject to additional governmental
    regulation.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our Mucinex D product contains pseudoephedrine HCl, a
FDA-approved ingredient for the relief of nasal congestion. We
intend to launch this product in the first quarter of 2006. We
understand that pseudoephedrine has been used in the illicit
manufacture of methamphetamine, a dangerous and addictive drug.
To date, we believe that nine states have enacted regulations
concerning the sale of pseudoephedrine, including limiting the
amount of these products that can be purchased at one time, or
requiring that these products be located behind the counter,
with the stated goal of deterring the illicit/illegal
manufacture of methamphetamine. Were such regulations to be
adopted throughout the United States, the impact of such
regulations on our sales of Mucinex D and the maximum strength
version of the same product cannot be predicted.
</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 Managing Growth</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 width="3%"></TD>
    <TD width="97%"></TD>
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<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We depend on our key personnel and if we are not able to
    retain them or recruit additional technical personnel, our
    business will suffer.</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;&nbsp;&nbsp;&nbsp;&nbsp;
We are highly dependent on the principal members of our
management. The continued service of our Chief Executive Officer
and President, Michael J. Valentino, is critical to our success.
Mr.&nbsp;Valentino is the only member of our management team
with whom we have entered into an employment agreement, but he
may terminate it on short or no 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;&nbsp;&nbsp;&nbsp;&nbsp;
The loss of any of our other executive officers, including our
Chief Financial Officer, David Becker, our Senior Vice President
of Research and Development, Helmut Albrecht, our Vice
President, Secretary and General Counsel, Walter E. Riehemann,
our Vice President of Business Development and Consumer
Marketing, Robert Casale, our Vice President of Regulatory
Affairs, Susan Witham, or our Vice President of Sales and
Professional Marketing, John Thievon, could cause disruption in
our business. We do not carry key man life insurance on any of
our key 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;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, our growth will require us to hire a significant
number of qualified technical personnel. Intense competition
exists among other companies and research and academic
institutions for qualified personnel. If we cannot continue to
attract and retain, on acceptable terms, the qualified personnel
necessary for the continued development of our business, we may
not be able to sustain our operations or grow 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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    <TD width="3%"></TD>
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    <TD></TD>
    <TD>
    <B><I>We may undertake strategic acquisitions of technologies
    and products. Integration of such technologies and products will
    involve a variety of costs and we may never realize the
    anticipated benefits of such acquisitions.</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;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to pursue opportunities to acquire technologies,
brands and products that would allow us to leverage our
professional sales force or our marketing and development
expertise or enhance our product portfolio or brand recognition
in the OTC and prescription markets. Acquisitions typically
entail many risks, including risks related to the integration of
the technologies and products. In attempting to integrate such
technologies and products, we may experience unexpected
integration costs and delays, which may divert management and
employee attention and disrupt our ability to develop and
introduce new products. If we are not able to successfully
integrate our acquisitions, we may not be able to realize the
intended benefits of the acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of acquiring products or entering into other
significant transactions, we have experienced, and will likely
continue to experience, significant charges to earnings for
acquisitions and related expenses, including transaction costs,
closure costs or acquired in-process research and development
charges. These costs may include substantial fees for investment
bankers, attorneys, accountants, and financial printing costs.
Charges that we may incur in connection with acquisitions could
adversely affect our results of operations for particular
quarterly or annual periods.
</DIV>

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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>Risks Relating to Intellectual Property</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;">

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    <TD width="3%"></TD>
    <TD width="97%"></TD>
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    <TD></TD>
    <TD>
    <B><I>If our patent position does not adequately protect our
    products and future products, others will be able to compete
    against us more directly, which may 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;&nbsp;&nbsp;&nbsp;&nbsp;
Our patent portfolio includes one U.S.&nbsp;patent, two foreign
patents and several patent applications. Our most significant
patent is currently the U.S.&nbsp;patent, which contains claims
covering a long-acting guaifenesin product, including an
immediate release portion and an extended-release portion that
yields a certain pharmacokinetic profile. The active ingredients
in our products and most of our product candidates, including
guaifenesin, dextromethorphan and pseudoephedrine, are chemical
compounds that have been in existence for many years and are not
covered by patents that claim these chemical compounds. Our
patents cover a formulation of a product that delivers
guaifenesin with a bi-phasic release pattern. They do not and
will not contain compound claims for the chemicals in these
products. We cannot be sure that our patents will effectively
exclude competitors from introducing similar, or even more
effective, products offering the same ingredients employing a
different delivery system.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our success will depend, in large part, on our ability to obtain
additional patents in the United States, maintain our existing
patent position and obtain and maintain adequate protection for
the other intellectual property incorporated into our products.
Our patents may be challenged, narrowed, invalidated, or
circumvented, which could limit our ability to stop competitors
from marketing similar products or limit the length of term of
patent protection we may have for our products. We cannot be
sure that we will receive patents for any of our pending patent
applications or any patent applications we may file in the
future. In addition, our patents may not afford us protection
against competitors with similar technology. Because patent
applications in the United States and many foreign jurisdictions
are typically not published until 18&nbsp;months after filing,
or in some cases not at all, and because publications of
discoveries in the scientific literature often lag behind actual
discoveries, we cannot be certain that we were the first to make
the inventions claimed in issued patents or pending patent
applications or that we were the first to file for protection of
the inventions set forth in these patent applications. If we do
not adequately protect our intellectual property, competitors
may be able to use our technologies and erode or negate any
competitive advantage we may have, which could harm our business
and financial results.
</DIV>

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

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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 intellectual property
    rights related to our brands, our ability to compete effectively
    in the markets for our products could be negatively
    impacted.</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;&nbsp;&nbsp;&nbsp;&nbsp;
A significant part of our business strategy is to position
Mucinex as a preferred brand for relief of respiratory
congestion for the OTC cough, cold, allergy, and sinus market.
We believe that familiarity with our brand is an important
competitive advantage and that the growth and sustainability of
our market share for the Mucinex product line will depend to a
significant extent upon the goodwill associated with our related
trademarks and trade names. We intend to use the trademarks and
trade names on our products to convey that the products we sell
are &#147;brand name&#148; products, and we believe consumers
ascribe value to our brands. We own the material trademark and
trade name rights used in connection with the packaging,
marketing and sale of our Mucinex products. This ownership
prevents our competitors or new entrants to the market from
using our brand names. Therefore, we view trademark and trade
name protection as critical to our business. Although most of
our trademarks are registered in the United States, we may not
be successful in asserting trademark or trade name protection.
If we were to lose the exclusive right to use the Mucinex brand
name or other brand names we establish or acquire in the future,
our sales and operating results could be materially and
adversely affected. We could also incur substantial costs to
prosecute or defend legal actions relating to the use of our
trademarks and trade names, which could have a material adverse
effect on our business, results of operations or financial
condition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Additionally, other parties may infringe on our property rights
in our trademarks and trade names, which may dilute the value of
our brands in the marketplace. Our competitors may also
introduce brands that cause confusion with our brands in the
marketplace, which could adversely affect the value that our
customers associate with our brands and thereby negatively
impact our sales. Any such infringement of our intellectual
property rights would also likely result in a commitment of our
time and resources to protect
</DIV>

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these rights through litigation or otherwise. In addition, third
parties may assert claims against our trademark and trade name
rights, and we may not be able to successfully resolve these
claims. In such event, we may lose our ability to use the brand
names that were the subject of these claims, which could have a
material adverse impact on our sales and operating results.
</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>If we are unable to protect the confidentiality of our
    trade secrets and proprietary information, our technology and
    information may be used by others to compete against 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;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to patented technology, we rely upon unpatented
proprietary technology, processes and know-how. We seek to
protect this information in part by confidentiality agreements
with our employees, consultants and third parties. These
agreements may be breached, and we may not have adequate
remedies for any such breach. In addition, our trade secrets may
otherwise become known or be independently discovered by
competitors. If we do not adequately protect our trade secrets
and proprietary information, competitors may be able to use our
technologies and erode or negate any competitive advantage we
may have, which could harm our business and financial results.
</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>Legal proceedings or third party claims of intellectual
    property infringement may require us to spend time and money and
    could prevent us from developing or commercializing
    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;&nbsp;&nbsp;&nbsp;&nbsp;
Our technologies, products or potential products in development
may infringe rights under patents or patent applications of
third parties. Third parties may own or control these patents
and patent applications in the United States and abroad. These
third parties could bring claims against us that would cause us
to incur substantial expenses and, if successful, could cause us
to pay substantial damages. Further, if a patent infringement
suit were brought against us, we could be forced to stop or
delay research, development, manufacturing, or sales of the
product or product candidate that is the subject of the suit.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of patent infringement claims, or to avoid potential
claims, we may choose to seek, or be required to seek, a license
from the third party and would most likely be required to pay
license fees or royalties or both. These licenses may not be
available on acceptable terms, or at all. Even if we were able
to obtain a license, the rights may be nonexclusive, which would
give our competitors access to the same intellectual property.
Ultimately, we could be prevented from commercializing a product
or be forced to cease some aspect of our business operations if,
as a result of actual or threatened patent infringement claims,
we are unable to enter into licenses on acceptable terms. This
inability to enter into licenses could harm our business
significantly.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The pharmaceutical industry has experienced substantial
litigation and other proceedings regarding patent and other
intellectual property rights. In addition to infringement claims
against us, we may become a party to other patent litigation and
other proceedings, including interference proceedings declared
by the United States Patent and Trademark Office and opposition
proceedings in the European Patent Office, regarding
intellectual property rights with respect to our products and
technology. The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial.
Some of our competitors may be able to sustain the costs of such
litigation or proceedings more effectively because of their
substantially greater financial resources. Uncertainties
resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse
effect on our ability to compete in the marketplace. Patent
litigation and other proceedings may also absorb significant
management 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>Risks Relating to Future Financing Needs</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 width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We may need additional financing, which may be difficult
    to obtain. Our failure to obtain necessary financing or doing so
    on unattractive terms could adversely affect our marketing and
    development programs and other 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;&nbsp;&nbsp;&nbsp;&nbsp;
We will require substantial funds to commercialize our products,
launch new products, promote our brand, and conduct development,
including preclinical testing and clinical trials, of our
potential products. We currently believe that we will generate
sufficient revenue through our product sales, together
</DIV>

<P align="center" style="font-size: 10pt;">18

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with our net proceeds from this offering, to fund our
anticipated levels of operations through at
least &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
However, our future capital requirements will depend on many
factors, including:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the success of our commercialization of Mucinex SE and Mucinex
    DM and the costs associated with related marketing, promotional
    and sales efforts;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the timing of new product launches, product development and
    advancement of other product candidates into development;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    potential acquisition or in-licensing of other products or
    technologies;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the timing of, and the costs involved in, obtaining regulatory
    approvals;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the cost of manufacturing activities, including raw material
    sourcing and regulatory compliance;&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 costs involved in establishing and protecting our patent,
    trademark and other intellectual property rights.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Additional financing may not be available to us when we need it
or on favorable terms. If we are unable to obtain adequate
financing on a timely basis, we may be required to significantly
curtail one or more of our marketing, development, licensing, or
acquisition programs. We could be required to seek funds through
arrangements with others that may require us to relinquish
rights to some of our technologies, product candidates or
products that we would otherwise pursue on our own. If we raise
additional funds by issuing equity securities, our then-existing
stockholders will experience dilution and the terms of any new
equity securities may have preferences over 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 This Offering</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 width="3%"></TD>
    <TD width="97%"></TD>
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<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We have broad discretion in the use of the net proceeds
    from this offering and may not use them effectively.</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;&nbsp;&nbsp;&nbsp;&nbsp;
We cannot specify with certainty the particular uses of the net
proceeds that we will receive from this offering. Our management
will have broad discretion in the application of the net
proceeds, including for any of the purposes described in the
&#147;Use of Proceeds&#148; section of this prospectus. Our
stockholders may not agree with the manner in which our
management chooses to allocate and spend the net proceeds. The
failure by our management to apply these funds effectively could
have a material adverse effect on our business. Pending their
use, we may invest the net proceeds from this offering in a
manner that does not produce income or that loses value.
</DIV>

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

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>After this offering, our executive officers, directors and
    major stockholders will maintain the ability to control all
    matters submitted to stockholders for approval.</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;&nbsp;&nbsp;&nbsp;&nbsp;
When this offering is completed, our executive officers,
directors and stockholders who owned more than 5% of our
outstanding common stock before the completion of this offering,
will, in the aggregate, beneficially own shares representing
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
of our capital stock. As a result, if these stockholders were to
choose to act together, they would be able to control all
matters submitted to our stockholders for approval, as well as
our management and affairs. For example, these persons, if they
choose to act together, will control the election of directors
and approval of any merger, consolidation or sale of all or
substantially all of our assets. This concentration of voting
power could delay or prevent an acquisition of our company on
terms that other stockholders may desire.
</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>Provisions in our certificate of incorporation and under
    Delaware law may prevent or frustrate attempts by our
    stockholders to change our management and hinder efforts to
    acquire a controlling interest in 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;&nbsp;&nbsp;&nbsp;&nbsp;
Provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a
premium for your shares. These provisions may also
</DIV>

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prevent or frustrate attempts by our stockholders to replace or
remove our 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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a classified board of directors;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    limitations on the removal of directors;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    advance notice requirements for stockholder proposals and
    nominations;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the inability of stockholders to act by written consent or to
    call special meetings;&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 ability of our board of directors to designate the terms of
    and issue new series of preferred stock without stockholder
    approval.</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;&nbsp;&nbsp;&nbsp;&nbsp;
The affirmative vote of the holders of at least
66<FONT style="font-size: 70%"><SUP>2</SUP></FONT>/<FONT style="font-size: 60%">3</FONT>%
of our shares of capital stock entitled to vote is necessary to
amend or repeal the above provisions of our certificate of
incorporation. In addition, absent approval of our board of
directors, our bylaws may only be amended or repealed by the
affirmative vote of the holders of at least
66<FONT style="font-size: 70%"><SUP>2</SUP></FONT>/<FONT style="font-size: 60%">3</FONT>%
of our shares of capital stock entitled to vote.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, Section&nbsp;203 of the Delaware General
Corporation Law prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person who, together with its
affiliates, owns or within the last three years has owned 15% of
our voting stock, for a period of three years after the date of
the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner. Accordingly, Section&nbsp;203 may discourage,
delay or prevent a change in control of our 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>If you purchase shares of our common stock in this
    offering, you will suffer immediate and substantial dilution of
    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;&nbsp;&nbsp;&nbsp;&nbsp;
Purchasers of common stock in this offering will pay a price per
share that substantially exceeds the per share value of our
tangible assets after subtracting our liabilities and the per
share price paid by our existing stockholders and by persons who
exercise currently outstanding options to acquire our common
stock. Accordingly, assuming an initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, you will experience immediate and substantial dilution of
$&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 at the assumed initial public offering price. In
addition, purchasers of common stock in this offering will have
contributed
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
of our common stock outstanding after this offering.
</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>An active trading market for our common stock may not
    develop.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to this offering, there has been no public market for our
common stock. Although we expect that our common stock will have
been approved for quotation on the Nasdaq National Market, an
active trading market for our shares may never develop or be
sustained following this offering. The initial public offering
price for our common stock will be determined through
negotiations with the underwriters. This initial public offering
price may vary from the market price of our common stock after
the offering. Investors may not be able to sell their common
stock at or above the initial public offering price.
</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>If our stock price is volatile, purchasers of our common
    stock could incur substantial losses.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our stock price is likely to be volatile. The stock market in
general and the market for pharmaceutical companies in
particular have experienced extreme volatility that has often
been unrelated to the operating performance of particular
companies. As a result of this volatility, investors may not be
able to sell their common stock at or above the initial public
offering price. The market price for our common stock may be
influenced by many factors, including:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    developments by our competitors;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the regulatory status of Mucinex&nbsp;SE, Mucinex&nbsp;DM and
    our other potential products;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">20

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<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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    failure of any of our product candidates, if approved, to
    achieve commercial success;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    regulatory developments in the United States;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    developments or disputes concerning patents or other proprietary
    rights;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    our ability to manufacture products to commercial standards;</TD>
</TR>

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

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

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the departure of key personnel;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    future sales of our common stock;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    variations in our financial results or those of companies that
    are perceived to be similar to us;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    changes in the structure of healthcare payment systems;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    investors&#146; perceptions of us;&nbsp;and</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    general economic, industry and market conditions.</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="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>If there are substantial sales of our common stock, our
    stock price could decline.</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;&nbsp;&nbsp;&nbsp;&nbsp;
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that existing
stockholders might sell shares of common stock, the market price
of our common stock could decline significantly. All of the
shares being sold in this offering will be freely tradable
without restriction or further registration under the federal
securities laws, unless purchased by our &#147;affiliates&#148;
as that term is defined in Rule&nbsp;144 under the Securities
Act. Substantially all of the remaining shares to be outstanding
upon completion of this offering will be eligible for sale
pursuant to Rule&nbsp;144 upon the expiration of lock-up
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;&nbsp;&nbsp;&nbsp;&nbsp;
Upon completion of this offering, holders of an aggregate of
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock will have rights to require us to register these
shares of common stock with the Securities and Exchange
Commission. If we register their shares of common stock
following the expiration of the lock-up agreements, they can
sell those shares in the public market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Promptly following this offering, we intend to register
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock that are authorized for issuance under our stock
plans. As of February&nbsp;28, 2005, 5,113,411&nbsp;shares were
subject to outstanding options, all of which were immediately
exercisable. Once we register the shares authorized for issuance
under our stock plans, they can be freely sold in the public
market upon issuance, subject to our repurchase rights, the
lock-up agreements referred to above and the restrictions
imposed on our affiliates under Rule&nbsp;144.
</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>We will incur increased costs as a result of being a
    public company and our financial results 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;&nbsp;&nbsp;&nbsp;&nbsp;
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
These costs result from recently adopted corporate governance
requirements, including requirements under the Sarbanes-Oxley
Act of 2002, as well as the rules of the Securities and Exchange
Commission and the National Association of Securities Dealers.
We expect these rules and regulations to increase our legal and
finance compliance costs and to make some activities more
time-consuming and costly. These rules and regulations may make
obtaining director and officer liability insurance more
expensive and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the
same or similar coverage. As a result, attracting and retaining
qualified individuals to serve on our board of directors or as
executive officers may be more difficult. We continue to
evaluate and monitor developments with respect to compliance
with public company requirements and we cannot predict or
estimate the amount or timing of additional costs we may incur.
</DIV>

<P align="center" style="font-size: 10pt;">21
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<P><HR noshade><P>
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<DIV align="left" style="font-size: 10pt;">
 <A name='103'></A>
</DIV>

<!-- link1 "CAUTIONARY NOTE REGARDING FORWARD-LOOKING 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>CAUTIONARY NOTE&nbsp;REGARDING 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;&nbsp;&nbsp;&nbsp;&nbsp;
This prospectus contains forward-looking statements. All
statements, trend analyses and other information contained in
this prospectus relative to markets for our products and trends
in our operations or financial results, as well as other
statements including words such as &#147;may,&#148;
&#147;target,&#148; &#147;anticipate,&#148; &#147;believe,&#148;
&#147;plan,&#148; &#147;estimate,&#148; &#147;expect,&#148;
&#147;intend,&#148; &#147;project,&#148; and other similar
expressions, constitute forward-looking statements. We made
these statements based on our plans and current analyses of our
business and the pharmaceutical industry as a whole. We caution
that these statements may, and often do, vary from actual
results and the differences between these statements and actual
results can be material. Accordingly, we cannot assure you that
actual results will not differ from those expressed or implied
by the forward-looking statements. Factors that could contribute
to these differences include, among other things:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    general economic conditions and other factors, including our
    ability to sell our products;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    customer response to new products and marketing initiatives;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    increased competition in the sale of our pharmaceutical products
    and services and the retention of existing customers;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    regulatory changes or actions, including those relating to
    regulation of pharmaceutical products;&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 other factors discussed under the section entitled
    &#147;Risk Factors&#148; and elsewhere in this prospectus.</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;&nbsp;&nbsp;&nbsp;&nbsp;
You should not place undue reliance on any forward-looking
statement. The forward-looking statements in this prospectus
speak only as of the date of this prospectus. You should assume
that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus. Our
business, financial condition, results of operations, or
prospects may have changed since that date. Neither the delivery
of this prospectus nor the sale of the common shares means that
information contained in this prospectus is correct after the
date of this prospectus. Except as otherwise required by
applicable laws, we undertake no obligation to publicly update
or revise any forward-looking statements, the risk factors or
other information described in this prospectus, whether as a
result of new information, future events, changed circumstances,
or any other reason after the date of 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;&nbsp;&nbsp;&nbsp;&nbsp;
The Private Securities Litigation Reform Act of 1995 and
Section&nbsp;27A of the Securities Act do not protect any
statements we make in connection with this offering.
</DIV>

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

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<DIV align="left" style="font-size: 10pt;">
<A name='104'></A>
</DIV>

<!-- link1 "USE OF PROCEEDS" -->

<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;&nbsp;&nbsp;&nbsp;&nbsp;
We estimate the net proceeds from our sale of
the &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock in this offering to be approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
at an assumed initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, less the underwriting discount and commissions and
estimated offering expenses. We will not receive any proceeds
from the sale of our common stock by the selling stockholders in
this offering. If the underwriters exercise their over-allotment
option in full, we estimate 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;&nbsp;&nbsp;&nbsp;&nbsp;
The principal purposes of this offering are to increase our
capitalization and financial flexibility, to provide a public
market for our common stock and to facilitate access to public
capital 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;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to use the net proceeds of this offering as follows:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    to continue to build the Mucinex brand in the consumer and
    professional market;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    to fund product development activities;&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">
    for general corporate purposes, including working capital needs
    and potential acquisitions or product in-licensing, as described
    below.</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;&nbsp;&nbsp;&nbsp;&nbsp;
We may use a portion of the net proceeds for the acquisition of
businesses, products and technologies, though we have no
agreements or understandings with respect to any acquisition at
this 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;&nbsp;&nbsp;&nbsp;&nbsp;
The amounts that we actually expend for these specified purposes
may vary significantly depending on a number of factors,
including changes in our growth strategy, the amount of our
future revenues and expenses and our future cash flow. As a
result, we will retain broad discretion in the allocation of the
net proceeds of this offering and may spend such proceeds for
any purpose, including purposes not presently contemplated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pending the uses described above, we may invest the net proceeds
of this offering in short-term, interest-bearing,
investment-grade securities.
</DIV>

<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;&nbsp;&nbsp;&nbsp;&nbsp;
We declared and paid a stock dividend on our capital stock in
October 2000. We currently intend to retain all future earnings
to finance our development efforts, the development of our
proprietary technologies, the in-licensing or acquisition of
specialty pharmaceutical products and trademarks, and the
expansion of our business. We do not intend to declare or pay
cash dividends on our capital stock in the foreseeable future.
Any future determination to pay dividends will be at the
discretion of our board of directors and will depend upon our
results of operations, financial condition, contractual
restrictions, restrictions imposed by applicable law, and other
factors our board of directors deems relevant.
</DIV>

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

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<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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth our unaudited 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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

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

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    on an as adjusted basis to reflect the conversion of our
    preferred stock into 48,055,162&nbsp;shares of our common stock
    and sale of
    the &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of common stock offered by us in this offering at an assumed
    initial public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share after deducting the estimated underwriting discount and
    commissions and offering expenses (as described under &#147;Use
    of Proceeds&#148;).</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;&nbsp;&nbsp;&nbsp;&nbsp;
You should read this information together with our financial
statements and the notes to those statements appearing at the
end of this prospectus and the &#147;Management&#146;s
Discussion and Analysis of Financial Condition and Results of
Operations&#148; and the &#147;Selected Financial Data&#148;
sections of 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="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="63%">&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="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31, 2004</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <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 colspan="3">&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>As Adjusted</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>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(in thousands)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash, cash equivalents and short-term investments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>36,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="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>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable convertible 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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;A Convertible Preferred Stock, $0.01&nbsp;par value,
    15,000,000&nbsp;shares authorized, 12,271,333&nbsp;shares issued
    and outstanding, actual, no shares issued and outstanding, as
    adjusted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>72,444</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">
    Series&nbsp;B Convertible Preferred Stock, $0.01&nbsp;par value,
    20,000,000&nbsp;shares authorized, 16,129,197&nbsp;shares issued
    and outstanding, actual, no shares issued and outstanding, as
    adjusted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,517</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;C Convertible Preferred Stock, $0.01&nbsp;par value,
    15,000,000&nbsp;shares authorized, 13,814,937&nbsp;shares issued
    and outstanding, actual, no shares issued and outstanding, as
    adjusted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>99,468</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">
    Stockholders&#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>
</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">
    Common stock, $0.01&nbsp;par value; 100,000,000&nbsp;shares
    authorized, 17,361,537&nbsp;shares issued and outstanding,
    actual; 100,000,000&nbsp;shares
    authorized, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares issued
    and outstanding, as adjusted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>174</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">
    Additional paid-in capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(152,518</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>&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>(20,653</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 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>

</TR>

<TR>
    <TD colspan="3" 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>(172,997</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 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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total capitalization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>63,432</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="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>

</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;&nbsp;&nbsp;&nbsp;&nbsp;
The above share data excludes 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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    6,923,680 warrants to purchase common stock outstanding as of
    December&nbsp;31, 2004 at a weighted average exercise price of
    $0.23&nbsp;per share;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    2,655,734 warrants to purchase common stock outstanding as of
    December&nbsp;31, 2004 at an exercise price of $1.60&nbsp;per
    share; and</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    10,060,023 options to purchase common stock outstanding as of
    December&nbsp;31, 2004 at a weighted average exercise price of
    $0.56&nbsp;per share.</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 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: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our historical net tangible book deficit as of December&nbsp;31,
2004 was ($177.2)&nbsp;million, or approximately
($10.21)&nbsp;per share based upon 17,361,537 common shares
outstanding. Net tangible book value per share represents the
amount of stockholders&#146; equity less the net book value of
intangible assets divided by the number of shares of common
stock outstanding at that date. Our pro forma net tangible book
value as of December&nbsp;31, 2004 was approximately
$59.2&nbsp;million, or $0.90&nbsp;per common share, based on
65,416,699&nbsp;shares of common stock outstanding after giving
effect to the conversion of all outstanding preferred stock into
shares of our common stock.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net tangible book value dilution per share to new investors
represents the difference between the amount per share paid by
purchasers of common stock in this offering and the pro forma
net tangible book value per share of common stock immediately
after completion of this offering. After giving effect to our
sale
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock in this offering, after deducting the estimated
underwriting discount and commissions and offering expenses,
assuming an initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, our pro forma net tangible book value as of
December&nbsp;31, 2004 would have been
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. This amount represents an immediate increase in net
tangible book value of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to existing stockholders and an immediate dilution in net
tangible book value of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to purchasers of our common stock in this offering, as
illustrated in the following table:
</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="72%">&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="3%">&nbsp;</TD>
    <TD width="3%">&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">$</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>(10.21</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 attributable to conversion of redeemable convertible
    preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11.11</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma 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>0.90</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">
    Increase per share attributable 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">&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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma net tangible book value per share after giving effect
    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">$</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: 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">
    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: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Assuming the underwriters exercise in full their over-allotment
option, our pro forma net tangible book value at
December&nbsp;31, 2004 would have been approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, representing an immediate increase in the pro forma net
tangible book value of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to our existing stockholders and an immediate decrease in
net tangible book value of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to new investors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes, on the pro forma basis
discussed, as of December&nbsp;31, 2004, the differences between
existing stockholders and new investors with respect to the
number of shares of our common stock purchased from us, the
total consideration paid and the average price per share of our
common stock paid by existing stockholders, after giving effect
to the issuance
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock in this offering at an assumed offering
price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, after deducting the estimated underwriting discount and
commissions and offering expenses. See &#147;Use of
Proceeds.&#148;
</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="43%">&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="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="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="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</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="6" align="center" nowrap><B>Total</B></TD><TD></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><B>Shares Issued</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Consideration</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="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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Price Per</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>Number</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Percent</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Amount</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Percent</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Share</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>
</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="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;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</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">
    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">&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" 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>

</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>
    <TD>&nbsp;</TD>
    <TD align="left" 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="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<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; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If the underwriters exercise their over-allotment option in
full, the number of shares held by new investors will be
increased
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
or
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
of the total number of shares of our common stock outstanding
after this offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The discussion and tables above assume no exercise of stock
options or warrants outstanding and no issuance of shares
reserved for issuance under our equity incentive plans. As of
December&nbsp;31, 2004, there were:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    6,923,680&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants with a weighted average exercise price of
    $0.23&nbsp;per share;</TD>
</TR>

<TR>
    <TD style="font-size: 9pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    2,655,734&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants with a weighted average exercise price of
    $1.60&nbsp;per share;</TD>
</TR>

<TR>
    <TD style="font-size: 9pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    10,060,023&nbsp;shares of common stock issuable upon exercise of
    outstanding options with a weighted average exercise price of
    $0.56&nbsp;per share; and</TD>
</TR>

<TR>
    <TD style="font-size: 9pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    an additional 1,439,977&nbsp;shares reserved for future stock
    option grants and purchases under our existing equity
    compensation plans.</TD>
</TR>

</TABLE>

<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>

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

<!-- link1 "SELECTED 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 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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table presents our selected financial information,
which you should read in conjunction with, and is qualified in
its entirety by reference to, our historical financial
statements, the notes to those statements and
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations.&#148; The selected
financial information set forth below as of June&nbsp;30, 2004
and 2003 and for the years ended June&nbsp;30, 2004, 2003 and
2002 has been derived from our audited financial statements
included herein. The selected financial information as of
June&nbsp;30, 2002, 2001 and 2000 and for the years ended
June&nbsp;30, 2001 and 2000 have been derived from our audited
financial statements, which are not included in this prospectus.
The selected financial information as of and for the six months
ended December&nbsp;31, 2004 and 2003 has been derived from
unaudited financial statements, which include all adjustments
consisting of normal recurring accruals that we consider
necessary for a fair presentation of the financial position and
the results of operations for these periods. Historical results
are not indicative of future performance.
</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="26%">&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="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="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Six Months Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&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>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>Years Ended June&nbsp;30,</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>
    <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 colspan="2">&nbsp;</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>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>2003</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>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000</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>
    <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="6" align="center" nowrap><B>(unaudited)</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>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap><B>(in thousands, except per share amounts)</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">
    <B>Statements of Operations 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>
    <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">
    Net sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>62,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>27,074</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>61,295</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>14,038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>13,755</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,996</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,964</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">
    Cost of goods sold</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,049</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,928</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,252</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,024</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,134</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,513</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>
    <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">
    Gross margin</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48,671</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,025</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,367</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,786</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,731</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,862</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,451</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">
    Selling, marketing and administrative(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,768</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,968</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,875</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,119</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Product development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,719</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,419</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,580</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,660</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">
    Interest expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>52</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,582</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,601</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>228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>86</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <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>(294</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(52</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</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</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(180</TD>
    <TD align="left" valign="bottom" nowrap>)</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 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>
    <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">
    Income/(loss) before income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,086</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,702</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(22,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,476</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,821</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(9,414</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">
    Provision/(benefit) for income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,858</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>(16,124</TD>
    <TD align="left" valign="bottom" nowrap>)</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 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>
    <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 income/(loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35,826</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(22,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,476</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,821</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(9,414</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>
    <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">
    Accretion of preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,953</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(320</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(590</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(627</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(619</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(177</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(49</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>
    <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)/income applicable to common stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,725</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>8,622</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>35,236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(23,265</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(16,095</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(12,998</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(9,463</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>
    <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">
    (Loss)/earnings per common 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">&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">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.64</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.83</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.86</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.28</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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1.43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.64</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.83</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.86</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.28</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>
    <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">
    Pro forma earnings per common share(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>&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">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.58</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">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.49</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>

</TABLE>
</CENTER>

<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: 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: 8pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Selling, marketing and administrative includes non-cash
    stock-based compensation expense as follows:</TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 8pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="42%">&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="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Six Months Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>Years Ended June&nbsp;30,</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="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD>&nbsp;</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>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>2003</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>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000</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>
    <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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</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>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>


<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap><B>(in thousands)</B></TD><TD></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>179</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>343</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>686</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,292</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,256</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>212</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<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: 8pt;">

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

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Please see Note&nbsp;1 to our financial statements for an
    explanation of the method used to compute pro forma earnings per
    common share, basic and diluted, and the number of shares used
    in computing per share amounts.</TD>
</TR>

</TABLE>

<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="30%">&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="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="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>At June&nbsp;30,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>At December&nbsp;31,</B></TD><TD></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>2004</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>2003</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>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2000</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>
    <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="2" align="center" nowrap><B>(unaudited)</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>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>(in thousands)</B></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>
    <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, cash equivalents and short-term investments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>36,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>43,391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>7,272</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,507</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>166</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>55,106</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>47,151</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,230</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,766</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,155</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,245</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>85,977</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71,035</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,382</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,784</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,801</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>2,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,731</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,873</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>3,400</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable convertible preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>236,429</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>110,851</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60,647</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>68,851</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,906</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>(20,653</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(29,881</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(65,707</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(43,069</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(27,593</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(14,772</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</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(172,997</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(56,997</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(64,169</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(56,517</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(34,721</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(16,180</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">28

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<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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and related notes appearing elsewhere in
this prospectus. Data presented as of December&nbsp;31, 2004 and
2003 and for the interim periods then ended is based on our
unaudited financial statements presented elsewhere in this
prospectus. Some of the information contained in this discussion
and analysis or set forth elsewhere in this prospectus,
including information with respect to our plans and strategy for
our business and related financing, includes forward-looking
statements that involve risks and uncertainties. You should
review the section entitled &#147;Risk Factors&#148; section of
this prospectus for a discussion of important factors that could
cause our actual results to differ materially from the results
described in or implied by the forward-looking statements
contained in the following discussion and analysis.</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><I>Overview</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;&nbsp;&nbsp;&nbsp;&nbsp;
We are a specialty pharmaceutical company focused on late-stage
development, commercialization and marketing of OTC&nbsp;and
prescription pharmaceuticals for the treatment of respiratory
disorders. We currently market two products, Mucinex SE and
Mucinex DM.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Mucinex SE.</I> Mucinex SE is a long-acting,
single-ingredient guaifenesin OTC product and the only
long-acting guaifenesin product approved by the FDA. The FDA
approved Mucinex SE in July 2002.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Mucinex DM.</I> Mucinex DM is an OTC product containing
long-acting guaifenesin and the cough suppressant
dextromethorphan, and is the only FDA-approved, long-acting
guaifenesin and dextromethorphan combination product. The FDA
approved Mucinex DM in April 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Future Products.</I> We have four additional products that
have been approved by the FDA that we intend to market in the
future: Mucinex D, an OTC product containing long-acting
guaifenesin and the decongestant, pseudoephedrine; a maximum
strength long-acting, single-ingredient guaifenesin OTC product
(under the Humibid brand name); a maximum strength OTC
combination product containing long-acting guaifenesin and
dextromethorphan; and a maximum strength OTC combination product
containing long-acting guaifenesin and pseudoephedrine. Like
Mucinex&nbsp;SE and Mucinex&nbsp;DM, these additional products
are the only FDA-approved products of their kind.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Revenue Growth.</I> Our net revenues have grown from
$13.8&nbsp;million for the year ended June&nbsp;30, 2002 to
$14.0&nbsp;million and $61.3&nbsp;million for the years ended
June&nbsp;30, 2003 and 2004, respectively. Our net revenues for
the six months ended December&nbsp;31, 2003 and 2004 were
$27.1&nbsp;million and $62.0&nbsp;million, respectively. Our
revenue growth has been primarily driven by Mucinex SE sales
following its launch in July 2002 and Mucinex DM sales following
its launch in August 2004. We believe that the key factors
underlying the growth of Mucinex SE and Mucinex DM revenues
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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>The FDA&#146;s removal of competitive long-acting,
    single-ingredient guaifenesin prescription products in November
    2003.</I> This removal resulted in Mucinex SE being the only
    long-acting, single-ingredient guaifenesin product available in
    the United States. Based on data from IMS
    Health&#150;NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">TM</FONT></SUP>,
    we estimate that, for the 12&nbsp;months ended June&nbsp;30,
    2003, there were approximately 10.5&nbsp;million prescriptions
    filled for long-acting, single-ingredient guaifenesin products.
    After November 2003, we believe that a majority of prescriptions
    written for long-acting, single-ingredient guaifenesin resulted
    in OTC sales of our Mucinex SE product.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Our professional marketing efforts to physicians, pharmacists
    and other healthcare professionals.</I> Our professional sales
    force targets high-prescribers of long-acting guaifenesin
    products and encourages them to recommend Mucinex SE and Mucinex
    DM to their patients. Our professional sales force also educates
    physicians, pharmacists and other healthcare professionals about
    the benefits of long-acting guaifenesin. In December 2004, we
    expanded our professional sales force from 50 to 100 sales
    representatives.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">29
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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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Expansion of our trade sales department and trade development
    efforts.</I> Our trade sales force calls on national and
    regional retail accounts and wholesale distribution companies.
    The primary focus of our trade sales force is to maximize our
    shelf presence at retail drug, food and mass merchandise stores
    to support the efforts of our professional sales representatives
    and consumer advertising campaign. Between December 2003 and
    December 2004, we grew our trade sales force function from one
    to six professionals.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Consumer Advertising Campaign.</I> Prior to the FDA&#146;s
    approval of Mucinex SE as an OTC drug, long-acting guaifenesin
    and combination products were available only by prescription. We
    launched our consumer advertising campaign in November 2004, and
    our strategy is to educate customers about the unique benefits
    of Mucinex to encourage trial of our products.</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Results of Operations.</I> We commenced operations in 1997,
and as of June&nbsp;30, 2003, we had an accumulated deficit of
$65.7&nbsp;million. During the fiscal year ended June&nbsp;30,
2004, we reported net income of $35.8&nbsp;million, which
included an income tax benefit of approximately
$16.1&nbsp;million related primarily to the reversal of the
valuation allowance that had been recorded against the deferred
tax asset resulting from accumulated net operating losses.
During the six months ended December&nbsp;31, 2004, we reported
net income of $9.2&nbsp;million, which reduced the accumulated
deficit at December&nbsp;31, 2004 to $20.7&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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Seasonality.</I> Retail sales of our products have
historically been concentrated between October&nbsp;1 and
March&nbsp;31 due to the prevalence of respiratory congestion
and cough during the cough, cold and flu season. We believe
retail sales of our products to consumers generally occur
approximately three months following our shipment of products to
trade customers and as a result, we typically recognize revenue
in the quarter prior to retail sales of our 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Future Growth.</I> We believe that our future growth will be
driven by professional and consumer marketing efforts to create
increased awareness of the Mucinex brand and the benefits of
long-acting guaifenesin and new product launches such as Mucinex
D and our maximum strength products. Additionally, the FDA may
take action to remove from the market the current long-acting
guaifenesin products similar to Mucinex DM and Mucinex&nbsp;D,
which could have a beneficial impact on our business. We plan to
continue to spend significant amounts on the commercialization
of our current products, the continuing development of our
pipeline products and the in-licensing or acquisition of new
product candidates. Our future profitability is dependent upon
the successful commercialization of Mucinex&nbsp;SE and
Mucinex&nbsp;DM and the introduction of new products such as
Mucinex D and Humibid.
</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>Critical Accounting Policies and Estimates</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our financial statements are presented on the basis of
accounting principles that are generally accepted in the United
States. We have taken into consideration all professional
accounting standards that are effective as of the date of these
financial statements. Included within these policies are our
&#147;critical accounting policies.&#148; Critical accounting
policies are those policies that are most important to the
preparation of our financial statements and require
management&#146;s most subjective and complex judgments due to
the need to make estimates about matters that are inherently
uncertain. Although we believe that our estimates and
assumptions are reasonable, actual results may differ
significantly from these estimates. Changes in estimates and
assumptions based upon actual results may have a material impact
on our results of operations and financial condition. Our
critical accounting policies are described in detail 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;&nbsp;&nbsp;&nbsp;&nbsp;
While our significant accounting policies are more fully
described in Note&nbsp;1 to our financial statements contained
in this prospectus, we believe that the following accounting
policies relating to revenue recognition, sales returns and
allowances, cost of goods sold (Cardinal Health profit share),
income taxes, and stock-based compensation charges are most
critical in fully understanding and evaluating our reported
financial results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Revenue Recognition.</I> We recognize revenue when title and
risk of loss have transferred to the customer, when estimated
provisions for product returns, rebates, chargebacks, and other
sales allowances
</DIV>

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<DIV align="left" style="font-size: 10pt;">
are reasonably determinable and when collection is reasonably
assured. Accruals for these provisions are presented in the
financial statements as reductions to 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Sales Returns and Allowances.</I> When we sell our products,
we reduce the amount of revenue recognized from such sale by an
estimate of future product returns and other sales allowances.
Other sales allowances include cash discounts, rebates,
including Medicaid rebates, chargebacks, sales incentives, and
royalties relating to products sold in the current period.
Factors that are considered in our estimates of future product
returns include an estimate of the amount of product in the
trade channel, competitive products, the remaining time to
expiration of the product, and the historical rate of returns.
Consistent with industry practice, we maintain a return policy
that allows our customers to return product within a specified
period prior to and subsequent to the expiration date. Factors
that are considered in our estimates regarding other sales
allowances include historical payment experience in relationship
to revenues, estimated customer inventory levels and current
contract prices and terms with both direct and indirect
customers and product royalty rates. If actual future payments
for product returns and other sales allowances exceed the
estimates we made at the time of sale, our financial position,
results of operations and cash flow would be negatively impacted.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Cardinal Health Profit Share.</I> In April 2004, we sold
substantially all of our manufacturing assets, raw materials and
in-process inventory located in Fort&nbsp;Worth, Texas to
Cardinal Health. Pursuant to our supply agreement with Cardinal
Health, Cardinal Health manufactures and supplies all of our
existing drug products. Under this supply agreement, Cardinal
Health is required to segregate direct manufacturing costs from
indirect manufacturing costs. As finished goods are completed
and shipped to a warehouse we designate, Cardinal Health bills
us for the actual direct manufacturing costs incurred plus a
mark-up. This mark-up is merely provided for interim billing
purposes and the actual amount payable to Cardinal Health is
calculated at the end of each calendar quarter under a profit
sharing formula. Profit for this purpose is calculated as net
sales less the actual direct manufacturing cost of products sold
during the calendar quarter and less freight and other logistics
costs. The resulting profit is subject to profit sharing rates
that decline as the total value of this profit increases. At the
end of each calendar quarter, a reconciliation is completed and
a billing adjustment is made to the extent that the actual
profit share differs from the total mark-up paid to Cardinal
Health during the calendar quarter.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The accounting policy with regard to this arrangement is to
record the actual direct manufacturing cost and mark-up billed
by Cardinal Health as inventory. Each month, as product is sold,
the actual direct manufacturing cost plus an estimate of the
profit share amount earned by Cardinal Health is charged to cost
of sales. The estimated profit share amount considers for each
contract year (i)&nbsp;our projected net product sales and gross
profit, (ii)&nbsp;the projected profit share and (iii)&nbsp;the
contractual minimum profit share 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Income Taxes.</I> Income taxes are accounted for in
accordance with Statement of Financial Accounting Standards, or
SFAS, No.&nbsp;109, <I>Accounting for Income Taxes</I>. Under
this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
years in which the differences are expected to reverse. Our net
deferred tax assets relate primarily to net operating loss
carryforwards, or NOL, research credits and sales reserves. In
assessing the reliability of deferred tax assets, we consider
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. This assessment
requires significant judgment and estimates. The ultimate
realization of the deferred tax assets is dependent upon the
generation of future taxable income during the period in which
those temporary differences become deductible. We consider our
history of losses, scheduled reversal of deferred tax assets and
liabilities and projected future taxable income over the periods
in which the deferred tax items are deductible. In addition,
Internal Revenue Code Sections&nbsp;382 and 383 contain
provisions that may limit the NOL available to be used in any
given year upon the occurrence of certain events, including
significant changes in ownership interest. During fiscal year
2004, we utilized approximately 50% of our NOLs. Given this
utilization, as well as projections for taxable income during
fiscal 2005, the entire valuation allowance was reversed at
June&nbsp;30, 2004.
</DIV>

<P align="center" style="font-size: 10pt;">31

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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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Stock-Based Compensation.</I> We account for stock-based
compensation in accordance with the fair value recognition
provisions of SFAS&nbsp;No.&nbsp;123, <I>Accounting for
Stock-Based Compensation</I>, as amended by
SFAS&nbsp;No.&nbsp;148, <I>Accounting for Stock-Based
Compensation&nbsp;&#150; Transition and Disclosure</I>, or
SFAS&nbsp;123, for stock-based employee compensation. We use the
graded-vesting methodology to record the stock-based
compensation expense over the vesting period, which generally
ranges from three to five years. This methodology results in a
greater amount of expense recognized towards the beginning of
the vesting period as opposed to the straight-line method.
Because subjective input assumptions can materially affect the
fair value estimate, in management&#146;s opinion, the existing
methods do not necessarily provide a reliable single measure of
the fair value of our stock options.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Accretion of Preferred Stock.</I> We adjust the carrying
value of the redeemable convertible Series&nbsp;A Preferred
Stock, or Series&nbsp;A Preferred Stock, the redeemable
convertible Series&nbsp;B Preferred Stock, or Series&nbsp;B
Preferred Stock, and the redeemable convertible Series&nbsp;C
Preferred Stock, or Series&nbsp;C Preferred Stock, to
liquidation value. Such accretion to liquidation value is
included in the calculation of net income applicable to common
stockholders. For Series&nbsp;A and Series&nbsp;B Preferred
Stock, the holder could receive, upon redemption, the fair
market value of the preferred stock. For Series&nbsp;C Preferred
Stock, the holder could receive, upon redemption, the fair
market value of the preferred stock if such value exceeds
liquidation value. To the extent that the fair market value is
greater than the accreted face value (for Series&nbsp;A and B
Preferred Stock) or liquidation value (for Series&nbsp;C
Preferred Stock) at the balance sheet date, the preferred stock
is adjusted to reflect the fair market value with the offset
charged to additional paid-in capital in stockholders&#146;
equity.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
We incurred approximately $870 and $1,196 of issuance costs in
connection with the issuance of Series&nbsp;A and B Preferred
Stock, respectively. Such costs have been recorded as a
reduction of the carrying amount of the preferred stock and are
being accreted through a charge to additional paid-in capital up
to the original redemption date, using the effective interest
method and are included in net income applicable to common
stockholders. There were no issuance costs associated with the
Series&nbsp;C 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><I>Operating Expenses</I></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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Product Development.</I> Our product development expenses
have historically consisted of formulation and analytical
development work with existing and well established drugs and
pharmaceutical ingredients, the development of scale-up and
manufacturing data and stability programs, human pharmacokinetic
studies to establish bioavailability and bioequivalence data for
our products versus reference drugs, as well as the preparation
and filing of NDAs. Further, we invest in the prosecution of
patents related to our products and in clinical research studies
in support of our products.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
Generally, our formulation, chemistry and analytical
manufacturing controls and stability work has been performed
utilizing our own employees and since April&nbsp;2004, in
cooperation with Cardinal Health. Product development expenses
include salary and benefits, raw materials and supplies,
facilities, depreciation, and other allocated expenses
associated with the performance of the above work and functions.
Pharmacokinetic studies, clinical trials and certain support
functions in preparing protocols, reports and other regulatory
documents are performed by scientific consultants and third
party contract research organizations.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Selling, Marketing and Administrative.</I> Selling, marketing
and administrative expenses include professional sales and
marketing, consumer marketing, trade sales and distribution
activities, and administrative expenses.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our professional selling and marketing expenses are comprised
primarily of (i)&nbsp;our professional sales representatives and
the related management function, which includes salary,
commission, benefits (including stock-based compensation), and
business related expenses, (ii)&nbsp;physician samples,
(iii)&nbsp;sales force training, (iv)&nbsp;sales force
information technology, and (v)&nbsp;market research and
advertising agency costs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our consumer marketing expenses are comprised of costs related
to (i)&nbsp;media, including television, radio and print
advertising, (ii)&nbsp;market research, (iii)&nbsp;website
operations, (iv)&nbsp;commercial
</DIV>

<P align="center" style="font-size: 10pt;">32

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<DIV align="left" style="font-size: 10pt;">
production, and (v)&nbsp;internal management personnel.
Substantially all of the costs associated with our consumer
marketing expenses are paid to an outside advertising agency.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our trade sales and distribution expenses are primarily
comprised of costs associated with our national and regional
trade sales personnel and their related territory operations and
outsourced warehouse and shipping operations paid to Cardinal
Health.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Administrative expenses include salaries and benefits (including
stock-based compensation), professional fees and facility costs.
We estimate that our administrative expenses will increase to
support our growing development, sales and marketing efforts. We
also expect to incur additional costs associated with operating
as a public company.
</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>Results of Operations</I></B>
</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="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B>Six Months Ended December&nbsp;31, 2004 Compared to Six
    Months Ended December&nbsp;31, 2003</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Net Sales.</I> Net sales increased by $34.9&nbsp;million to
$62.0&nbsp;million for the six months ended December&nbsp;31,
2004, as compared to $27.1&nbsp;million for the six months ended
December&nbsp;31, 2003. The increase in net sales during the six
months ended December&nbsp;31, 2004 is primarily due to
(i)&nbsp;Mucinex SE being the exclusive long-acting,
single-ingredient guaifenesin product available in the United
States for the full six months ended December&nbsp;31, 2004, as
compared to only one month during the six-month period ended
December&nbsp;31, 2003, (ii)&nbsp;the launch of our consumer
advertising campaign in November 2004 and (iii)&nbsp;the launch
of Mucinex DM, which was partially offset by a reduction in
other product sales. Other products consist of the AlleRx&#174;
and Aquatab product lines, which were discontinued in February
2005 and August 2004, 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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth our net sales for the six months
ended December&nbsp;31, 2004 and December&nbsp;31, 2003.
</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="40%">&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="8%">&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="9%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Six Months Ended December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</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="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Product</B></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>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Increase/(Decrease)</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>
</TR>


<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(in thousands)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mucinex SE</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>47,276</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>23,165</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>24,111</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mucinex DM</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,599</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>11,599</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other products</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,146</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,909</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(763</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">
    Net Sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>62,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>27,074</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>34,947</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: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Cost of Goods Sold.</I> Cost of goods sold increased
$8.3&nbsp;million to $13.4&nbsp;million for the six months ended
December&nbsp;31, 2004, as compared to $5.0&nbsp;million for the
six months ended December&nbsp;31, 2003. Cost of goods sold
increased in dollar terms primarily as a result of the increase
in Mucinex SE sales and the launch of Mucinex DM. As a
percentage of net sales, cost of goods sold during the six
months ended December&nbsp;31, 2004 represented 22%, as compared
to 19% for the same period in 2003. Cost of goods sold increased
as a percentage of net sales primarily as a result of the
outsourcing of product manufacturing to Cardinal Health.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Selling, Marketing and Administrative.</I> Selling, marketing
and administrative expenses increased $20.9&nbsp;million to
$30.8&nbsp;million for the six months ended December&nbsp;31,
2004, as compared to $9.8&nbsp;million for the six months ended
December&nbsp;31, 2003. The increase during the six months ended
December&nbsp;31, 2004 is primarily due to
(i)&nbsp;approximately $13.5&nbsp;million of spending on the
consumer advertising campaign, (ii)&nbsp;approximately
$1.1&nbsp;million of additional expense related to distribution
and shipping on the increased volume, (iii)&nbsp;approximately
$6.1&nbsp;million associated with various sales and marketing
programs such as the hiring of 50 additional sales
representatives, professional marketing and market research
expenses, expansion of the trade sales department, sales
training and meetings, and implementation of a sales force
automation system for our 100-person sales force, and
(iv)&nbsp;$1.4&nbsp;million of incremental general and
administrative expenses primarily related to new headcount,
information technology and performance bonuses. Stock-based
compensation is reflected within selling, marketing and
administrative expenses and
</DIV>

<P align="center" style="font-size: 10pt;">33

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<DIV align="left" style="font-size: 10pt;">
decreased by $164,000, or 48%, to $179,000 for the six months
ended December&nbsp;31, 2004, as compared to $343,000 reported
during the six months ended December&nbsp;31, 2003. The decrease
is primarily due to a lower number of stock options granted
during the six months ended December&nbsp;31, 2004, as compared
to the same period ended December&nbsp;31, 2003 and a reduction
in the minimum value per stock option used in calculating the
stock compensation 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Product Development.</I> Product development expenses
increased by $1.3&nbsp;million, or 78%, to $3.1&nbsp;million
during the six months ended December&nbsp;31, 2004, as compared
to $1.7&nbsp;million for the six months ended December&nbsp;31,
2003. The increase for the six months ended December&nbsp;31,
2004 is primarily attributable to continued development of our
Mucinex line extensions and other development projects.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Interest Expense.</I> Interest expense decreased by
$1.5&nbsp;million, or 97%, to $52,000 during the six months
ended December&nbsp;31, 2004, as compared to $1.6&nbsp;million
for the six months ended December&nbsp;31, 2003. The decrease in
interest expense is a result of our 8% Convertible Secured
Promissory Notes due 2005, or the 8% Convertible Notes, being
converted into our Series&nbsp;C Preferred Stock on
June&nbsp;30, 2004. The 8% Convertible Notes earned interest at
the rate of 8% annually and also required us to record non-cash
interest expense for the beneficial conversion feature and the
warrants to purchase common stock that were granted in
connection with the issuance of the 8% Convertible Notes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Interest Income.</I> Interest income increased $242,000 to
$294,000 during the six months ended December&nbsp;31, 2004, as
compared to $52,000 for the six months ended December&nbsp;31,
2003. The increase during the six months ended December&nbsp;31,
2004 is primarily due to our average cash balance of
approximately $35.1&nbsp;million during the six months ended
December&nbsp;31, 2004, as compared to approximately
$10.9&nbsp;million during the six months ended 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Income Taxes.</I> Income tax expense for the six months ended
December&nbsp;31, 2004 was $5.9&nbsp;million. We had no income
tax expense for the six months ended December&nbsp;31, 2003. Our
effective tax rate for the six months ended December&nbsp;31,
2004 was 39% compared to 0% for the six months ended
December&nbsp;31, 2003. At December&nbsp;31, 2003, we did not
believe that we had a sufficient earnings history to reduce the
valuation allowance that had been recorded against our deferred
tax assets that had accumulated primarily as a result of net
operating losses for income tax purposes. At June&nbsp;30, 2004,
we had approximately $25.7&nbsp;million of net NOL that is
subject to annual limitations due to the ownership change
limitations provided by the Internal Revenue Code.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Accretion of Preferred Stock.</I> Accretion of our redeemable
convertible preferred stock for the six months ended
December&nbsp;31, 2004 was $11.0&nbsp;million, as compared to
$320,000 for the six months ended December&nbsp;31, 2003. The
$10.7&nbsp;million increase in the six months ended
December&nbsp;31, 2004 reflects the accretion to liquidation
value of the Series&nbsp;C Preferred Stock. Upon the closing of
this offering, our redeemable convertible preferred stock will
automatically convert into shares of common stock and, as a
result, there will be no further accretion.
</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>Fiscal Year Ended June&nbsp;30, 2004 Compared to Fiscal Year
    Ended June&nbsp;30, 2003</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Net Sales.</I> Net sales increased by $47.3&nbsp;million to
$61.3&nbsp;million during the fiscal year ended June&nbsp;30,
2004, as compared to $14.0&nbsp;million during the fiscal year
ended June&nbsp;30, 2003. During fiscal year 2004,
Mucinex&nbsp;SE net sales increased approximately
$48.4&nbsp;million to $52.9&nbsp;million primarily as a result
of our exclusive market position in the long-acting,
single-ingredient guaifenesin market and the promotional efforts
of our professional sales force. Our other products, which have
been discontinued, decreased primarily as a result of our former
Aquatab product line being negatively impacted by generic
competition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Cost of Goods Sold.</I> Cost of goods sold increased by
$6.7&nbsp;million to $11.9&nbsp;million during the fiscal year
ended June&nbsp;30, 2004, as compared to $5.3&nbsp;million
during the fiscal year ended June&nbsp;30, 2003. The increase in
cost of goods sold from fiscal year 2003 to fiscal year 2004
primarily resulted from an increase in our unit sales of
Mucinex&nbsp;SE. As a percentage of net sales, cost of goods
sold decreased to 20% during the fiscal year ended June&nbsp;30,
2004 from 37% during the fiscal year ended June&nbsp;30, 2003,
primarily as a result of greater manufacturing efficiencies
related to increased production and the lack of a
</DIV>

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<DIV align="left" style="font-size: 10pt;">
one-time inventory charge of approximately $1.0&nbsp;million
recorded during fiscal year 2003. During fiscal year 2002, we
manufactured Mucinex&nbsp;SE inventory in anticipation of the
FDA&#146;s removal of the competitive unapproved products.
However, as the FDA granted the competitive manufacturers an
effective seventeen-month grace period, allowing them to remain
on the market until November&nbsp;30, 2003, approximately
$1.0&nbsp;million, or approximately 20&nbsp;million tablets, of
Mucinex&nbsp;SE inventory expired and was written off in fiscal
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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Selling, Marketing and Administrative.</I> Selling, marketing
and administrative expenses were essentially flat at
$23.3&nbsp;million during the fiscal year ended June&nbsp;30,
2004 and 2003. This result is primarily due to:
(i)&nbsp;employing ten fewer sales representatives during fiscal
2004 as compared to fiscal 2003; (ii)&nbsp;a reduction in
Mucinex SE sample expense during fiscal 2004 due to focusing our
production efforts on saleable trade product; and
(iii)&nbsp;settlement of a lawsuit with CellTech
Pharmaceuticals, Inc., or CellTech, during fiscal year 2003.
These expense reductions were offset by increases related to:
(i)&nbsp;the relocation of our headquarters from Texas to New
Jersey during April 2004; (ii)&nbsp;accrued management bonuses
due to meeting operating objectives; and (iii)&nbsp;increased
headcount in administration and trade sales departments.
Stock-based compensation is reflected within selling, marketing
and administrative expenses and decreased by $194,000, or 22%,
to $686,000 for the fiscal year ended June&nbsp;30, 2004, as
compared to $880,000 for the fiscal year 2003. This decrease is
primarily due to the reduction in the minimum value per option
used in calculating the stock compensation expense for fiscal
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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Product Development.</I> Product development expenses
decreased $1.4&nbsp;million, or 30%, to $3.2&nbsp;million during
the fiscal year ended June&nbsp;30, 2004, as compared to
$4.5&nbsp;million for the fiscal year ended June&nbsp;30, 2003.
This decrease is primarily the result of a reduction in expenses
associated with the later stages of development for Mucinex D
and Mucinex DM during fiscal 2004, as compared to the completion
of the clinical costs and NDA preparation costs for such
products during fiscal 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Interest Expense. </I>Interest expense decreased by $198,000,
or 5%, to $3.4&nbsp;million during the fiscal year ended
June&nbsp;30, 2004, as compared to $3.6&nbsp;million for the
fiscal year ended June&nbsp;30, 2003. Fiscal year 2004 interest
expense included approximately $1.7&nbsp;million of stated
interest related to the 8% Convertible Notes that were converted
to Series&nbsp;C Preferred Stock on June&nbsp;30, 2004 and
approximately $1.4&nbsp;million of non-cash debt discount
amortization related to the beneficial conversion feature and
the warrants to purchase common stock that were issued in
connection with the 8% Convertible Notes. Fiscal year 2003
interest expense was comprised of approximately $340,000 of
stated interest related to the 8% Convertible Notes and our 10%
Convertible Promissory Notes due 2003, or the Bridge Notes, and
approximately $3.2&nbsp;million of non-cash debt discount
amortization related to the warrants issued to purchase common
stock in connection with the Bridge Notes and the 8% Convertible
Notes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Interest Income.</I> Interest income increased by $176,000 to
$205,000 for the fiscal year ended June&nbsp;30, 2004, as
compared to $29,000 for the fiscal year ended June&nbsp;30,
2003. This is primarily a result of our average cash balance
increasing by approximately $18.1&nbsp;million to approximately
$26.4&nbsp;million during fiscal year 2004, as compared to
$8.3&nbsp;million during fiscal year 2003. Our average cash
balance increased primarily as a result of the funding under the
8% Convertible Notes between May and August 2003 as well as our
improved profitability during fiscal year 2004, as compared to a
net loss in fiscal year 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Income Taxes.</I> Income tax benefit for the fiscal year
ended June&nbsp;30, 2004 was approximately $16.1&nbsp;million
and resulted in an effective income tax rate of (82%). At
June&nbsp;30, 2004, after having achieved three consecutive
quarters of before-tax profit and based on financial projections
for fiscal year 2005, the valuation allowance that offset our
deferred tax asset was eliminated. At June&nbsp;30, 2004, our
NOL of approximately $25.7&nbsp;million was subject to annual
limitations due to the ownership change limitations provided by
the Internal Revenue Code. At June&nbsp;30, 2003, we had a NOL
of approximately $51.7&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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Accretion of Preferred Stock.</I> Accretion of our redeemable
convertible preferred stock for the year ended June&nbsp;30,
2004 was $590,000, as compared to $627,000 for the year ended
June&nbsp;30, 2003. The $37,000 decrease in the year ended
June&nbsp;30, 2004 reflects the timing of the accretion of
issuance costs on
</DIV>

<P align="center" style="font-size: 10pt;">35

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<DIV align="left" style="font-size: 10pt;">
the redeemable convertible preferred stock. Upon the closing of
this offering, our redeemable convertible preferred stock will
automatically convert into shares of common stock and as a
result, there will be no further accretion.
</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>Fiscal Year Ended June&nbsp;30, 2003 Compared to Fiscal Year
    Ended June&nbsp;30, 2002</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Net Sales.</I> Net sales increased by $283,000, or 2%, to
$14.0&nbsp;million during the fiscal year ended June&nbsp;30,
2003, as compared to $13.8&nbsp;million for the fiscal year
ended June&nbsp;30, 2002. This increase primarily resulted from
the launch of Mucinex&nbsp;SE, which was substantially offset by
the reduction in sales of our other products due to generic
competition on the Aquatab line of products. During July 2002,
we launched Mucinex SE and reported $4.5&nbsp;million of net
sales for fiscal year 2003. We believe Mucinex SE sales were
limited due to the unapproved prescription products remaining in
the marketplace for all of fiscal year 2003. Net sales of our
other products, which as of February&nbsp;15, 2005 have been
discontinued, decreased by $4.2&nbsp;million, or 31%, to
$9.5&nbsp;million for the fiscal year ended June&nbsp;30, 2003,
as compared to $13.8&nbsp;million for the fiscal year ended
June&nbsp;30, 2002. The decrease was primarily the result of
increased generic competition on our former Aquatab product line.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Cost of Goods Sold.</I> Cost of goods sold increased by
$1.2&nbsp;million, or 31%, to $5.3&nbsp;million during the
fiscal year ended June&nbsp;30, 2003, as compared to
$4.0&nbsp;million during the fiscal year ended June&nbsp;30,
2002, despite an increase in sales of only $283,000. The
increase primarily resulted from the one-time charge of
approximately $1.0&nbsp;million related to expired
Mucinex&nbsp;SE inventory that was expensed as cost of goods
sold during fiscal year 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Selling, Marketing and Administrative.</I> Selling, marketing
and administrative expenses increased by $5.3&nbsp;million, or
30%, to $23.3&nbsp;million during the fiscal year ended
June&nbsp;30, 2003, as compared to $18.0&nbsp;million during the
fiscal year ended June&nbsp;30, 2002. This increase primarily
resulted from employing approximately 60 professional sales
representatives during fiscal year 2003, as compared to
approximately 40 professional sales representatives during
fiscal year 2002 and incurring an approximate incremental
$1.2&nbsp;million of physician sample expense related to the
launch of Mucinex SE. In addition, during fiscal year 2003, our
administrative expenses increased as a result of an accrued
charge of $2.0&nbsp;million in connection with the CellTech
litigation. Stock-based compensation is reflected within
selling, marketing and administrative expenses. We recorded
stock-based compensation of $880,000 and $1.3&nbsp;million
during the fiscal years ended June&nbsp;30, 2003, and 2002,
respectively. This decrease was primarily due to the reduction
in the minimum value per stock option used in calculating the
stock compensation expense for fiscal 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Product Development.</I> Product development expenses
decreased by approximately $2.9&nbsp;million, or 39%, to
$4.5&nbsp;million during the fiscal year ended June&nbsp;30,
2003, as compared to $7.4&nbsp;million during the fiscal year
ended June&nbsp;30, 2002. This decrease is primarily
attributable to our fiscal year 2003 expenses being primarily
related to completion of the clinical work and NDA preparation
fees for Mucinex D, as compared to the more comprehensive and
expensive formulation, development and clinical work that was
performed for these products during fiscal year 2002.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Interest Expense. </I>Interest expense for the fiscal year
ended June&nbsp;30, 2003 totaled $3.6&nbsp;million and was
comprised of $340,000 of stated interest related to the 8%
Convertible Notes and the Bridge Notes and approximately
$3.2&nbsp;million of non-cash debt discount amortization related
to the beneficial conversion feature and the warrants issued to
purchase common stock in connection with the Bridge Notes and
the 8% Convertible Notes. We had no interest expense during
fiscal year 2002.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Interest Income.</I> Interest income decreased $151,000 to
$29,000 for the fiscal year ended June&nbsp;30, 2003, as
compared to $180,000 for the fiscal year ended June&nbsp;30,
2002. The decrease is primarily due to a reduction in our
average cash balances available for investing during fiscal year
2003, as compared to fiscal year 2002. During fiscal year 2002,
our cash balances were higher primarily as a result of our
$25.8&nbsp;million Series&nbsp;B Preferred Stock financing that
closed in July 2001.
</DIV>

<P align="center" style="font-size: 10pt;">36

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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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Accretion of Preferred Stock.</I> Accretion of our redeemable
convertible preferred stock for the year ended June&nbsp;30,
2003 was $627,000, as compared to $619,000 for the year ended
June&nbsp;30, 2002. The $8,000 decrease in the year ended
June&nbsp;30, 2003 reflects the timing of the accretion of
issuance costs on the redeemable convertible preferred stock at
June&nbsp;30, 2003. Upon the closing of this offering, our
redeemable convertible preferred stock will automatically
convert into shares of common stock and as a result, there will
be no further accretion.
</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>Liquidity and Capital Resources</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;&nbsp;&nbsp;&nbsp;&nbsp;
From inception through June&nbsp;30, 2003, we financed our
operations primarily through the net proceeds from private
placements of common stock, redeemable convertible preferred
stock, notes convertible into redeemable convertible preferred
stock, a revolving bank line of credit, and revenues generated
by our products. Total funding we received under sales of equity
securities and convertible notes, from inception to
December&nbsp;31, 2004, totaled approximately
$78.0&nbsp;million. Beginning with the quarter ended
December&nbsp;31, 2003, we have reported positive before tax
profit in each quarter.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2004, we had approximately
$36.7&nbsp;million of cash, cash equivalents and short-term
investments and working capital of $55.1&nbsp;million, which
includes a current deferred tax asset of $7.2&nbsp;million
related primarily to the future benefit of our net operating
losses for tax purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to the equity funding described above, we also had
access to a revolving line of credit with Silicon Valley Bank
that ranged from $3.0&nbsp;million to $5.0&nbsp;million between
2001 and November 2004. As of December&nbsp;31, 2004, our
revolving line of credit with Silicon Valley Bank has expired.
We have not had any outstanding balances under the revolving
line of credit since May 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;&nbsp;&nbsp;&nbsp;&nbsp;
We expect to increase our selling, marketing and administrative,
and our product development expenses. We anticipate our selling
and marketing expenses to increase as we seek to
(i)&nbsp;continue to switch long-acting guaifenesin and
combination prescription products into OTC sales of Mucinex
products, (ii)&nbsp;expand the market for long-acting
guaifenesin and combination products and (iii)&nbsp;increase our
share of the OTC cough, cold, allergy, and sinus markets.
Therefore, we believe that we may need to increase our number of
professional sales representatives beyond the current 100 and
increase our consumer advertising spending. We anticipate that
our administrative expenses will increase to support our current
growth plans and position as a public company. Our product
development expenses will likely increase as a result of our
current plans to (i)&nbsp;expand the Mucinex product line with
OTC and prescription line extensions and (ii)&nbsp;in-license or
acquire specialty pharmaceutical respiratory products and
trademarks that may require additional development expenditures
to achieve FDA marketing approval. We believe that our cash
outflows related to acquiring products and entering into
licensing agreements may increase as we pursue our product
portfolio expansion initiative. Additionally, if sales of our
current products continue to increase and/or we increase the
number of products in our portfolio, we may find it necessary to
consider alternative manufacturing capabilities, which may
include the acquisition of manufacturing facilities and
equipment and participating in capital expenditures under
contract manufacturing relationships.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe the proceeds from this offering, together with our
cash and cash equivalents, will be sufficient to meet our
anticipated operating needs for at least the
next &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;years.
We continually evaluate new opportunities for late-stage or
currently-marketed complementary product candidates and, if and
when appropriate, intend to pursue such opportunities through
the acquisitions of companies, products or technologies and our
own development activities. Our ability to execute on such
opportunities in some circumstances may be dependent, in part,
upon our ability to raise additional capital on commercially
reasonable terms. There can be no assurance that funds from
these sources will be available when needed or on terms
favorable to us or our stockholders. If additional funds are
raised by issuing equity securities, the percentage ownership of
our stockholders will be reduced, stockholders may experience
additional dilution or such equity securities may provide for
rights, preferences or privileges senior to those of the holders
of our common stock.
</DIV>

<P align="center" style="font-size: 10pt;">37
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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><I>Cash Flows</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Six months ended December&nbsp;31, 2004 compared to six
months ended December&nbsp;31, 2003.</I> Net cash used in
operating activities was $5.3&nbsp;million and $1.6&nbsp;million
for the six months ended December&nbsp;31, 2004 and 2003,
respectively. The increase in net cash used in operations during
the six months ended December&nbsp;31, 2004 was primarily due to
a prepayment of our consumer advertising expenses prior to
December&nbsp;31, 2004, which was partially offset by an
increase in accounts payable and a reduction to the deferred tax
assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net cash used in investing activities was $11.5&nbsp;million and
$54,000 for the six months ended December&nbsp;31, 2004 and
2003, respectively. The increase in net cash used in investing
activities was primarily due to the purchase of short-term
investments and for leasehold improvements and information
technology equipment installed at our new corporate headquarters
located in Chester, New Jersey.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net cash provided by financing activities was $171,000 and
$4.6&nbsp;million during the six months ended December&nbsp;31,
2004 and 2003, respectively. During the six months ended
December&nbsp;31, 2003, we received $4.6&nbsp;million of cash
from issuances of the 8% Convertible Notes. During the six
months ended December&nbsp;31, 2004, the proceeds from financing
activities were limited to the exercise of options and warrants
to purchase 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Fiscal Year ended June&nbsp;30, 2004 compared to fiscal year
ended June&nbsp;30, 2003.</I> Net cash provided by operations
was $25.8&nbsp;million for the fiscal year ended June&nbsp;30,
2004, as compared to net cash used in operations of
$13.6&nbsp;million during the fiscal year ended June&nbsp;30,
2003. The increase in cash provided by operations of
$39.4&nbsp;million was primarily a result of our net income for
fiscal 2004 of $35.8&nbsp;million versus a net loss of
$22.6&nbsp;million during fiscal year 2003. The increase in net
income was tempered by the non-cash impact of the reversal of
the income tax valuation allowance of $16.8&nbsp;million and the
payment of a $2.0&nbsp;million litigation settlement.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net cash provided by investing activities was $3.8&nbsp;million
during the fiscal year ended June&nbsp;30, 2004, as compared to
net cash used by investing activities of $402,000 during the
fiscal year ended June&nbsp;30, 2003. The increase in cash
provided by investing activities of $4.2&nbsp;million was
primarily due to the proceeds of $5.6&nbsp;million during fiscal
year 2004 related to the sale of our manufacturing assets to
Cardinal Health and was offset by a $1.3&nbsp;million payment
made during fiscal year 2004 related to a license agreement
entered into with Pharmaceutical Design L.L.C., or PD.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net cash provided by financing activities was $4.4&nbsp;million
and $16.1&nbsp;million for the fiscal years ended June&nbsp;30,
2004 and 2003, respectively. The decrease in net cash provided
by financing activities of $11.7&nbsp;million was primarily due
to the sale of $16.3&nbsp;million of the 8% Convertible Notes
during fiscal year 2003, as compared to only $4.6&nbsp;million
during fiscal year 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Fiscal Year ended June&nbsp;30, 2003 compared to fiscal year
ended June&nbsp;30, 2002.</I> Net cash used in operating
activities was $13.6&nbsp;million and $12.2&nbsp;million for the
fiscal years ended June&nbsp;30, 2003 and 2002, respectively.
The increase of cash used in operations of $1.4&nbsp;million was
primarily due to a $7.1&nbsp;million increase in the net loss
for fiscal year 2003, as compared to fiscal year 2002, which was
partially offset by an increase of $3.2&nbsp;million of non-cash
expenses primarily related to beneficial conversion interest and
an increase in operating liabilities in excess of operating
assets of approximately $1.3&nbsp;million and the
$2.0&nbsp;million accrual for the CellTech litigation settlement
in fiscal 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;&nbsp;&nbsp;&nbsp;&nbsp;
Net cash used in investing activities was $402,000 and
$1.9&nbsp;million for the fiscal years ended June&nbsp;30, 2003
and 2002, respectively. The decrease in net cash used by
investing activities of $1.5&nbsp;million was primarily due to a
$1.0&nbsp;million reduction in purchases of manufacturing
equipment and $500,000 payment made to extend the JMED
Pharmaceuticals, Inc., or JMED, license during fiscal year 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;&nbsp;&nbsp;&nbsp;&nbsp;
Net cash provided by financing activities was $16.1&nbsp;million
and $19.8&nbsp;million for the fiscal years ended June&nbsp;30,
2003 and 2002, respectively. During fiscal year 2003, we sold
approximately $16.3&nbsp;million of the 8% Convertible Notes and
Bridge Notes. During fiscal year 2002, we sold approximately
</DIV>

<P align="center" style="font-size: 10pt;">38

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<DIV align="left" style="font-size: 10pt;">
$21.4&nbsp;million of Series&nbsp;B Preferred Stock and
immediately paid off our revolving bank line of credit of
approximately $2.0&nbsp;million.
</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>Commitments and Contractual Obligations</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our major outstanding contractual obligations relate to
operating leases, raw material purchase commitments, minimum
profit share payments to Cardinal Health under the Cardinal
Health supply agreement, royalty payments on our Mucinex and
Humibid products, and payments under consulting agreements with
former employees. These contract obligations as of June&nbsp;30,
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="33%">&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="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="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>Less than</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>More than</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>Total</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>1&nbsp;Year</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>1-3&nbsp;Years</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>3-5&nbsp;Years</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>5&nbsp;Years</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>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>(in thousands)</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">
    Operating leases(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,531</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>829</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,438</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,537</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Purchase obligations(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,225</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,680</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">
    Cardinal Health profit share(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,000</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>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Royalty payments(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>550</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,000</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">
    Consulting payments(5)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>271</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>271</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 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>

</TR>

<TR>
    <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">$</TD>
    <TD align="right" valign="bottom" nowrap>22,222</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,740</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>11,007</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,537</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>

</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: 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: 8pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Includes the minimum rental payments for our corporate office
    building in Chester, New Jersey, office equipment leases and
    automobile lease payments for the sales force.</TD>
</TR>

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

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Consists of commitments to purchase raw materials.</TD>
</TR>

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

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Represents minimum profit share commitments to Cardinal Health
    under the supply agreement.</TD>
</TR>

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

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    Represents minimum royalty payments to CellTech and Cornerstone.</TD>
</TR>

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

<TR valign="top">
    <TD>(5)&nbsp;</TD>
    <TD align="left">
    Includes payments for consulting arrangements with former
    employees.</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;&nbsp;&nbsp;&nbsp;&nbsp;
In April 2004, we entered into a ten-year supply agreement with
Cardinal Health under which Cardinal Health has the exclusive
right to manufacture and supply all of our existing and future
drug products, unless Cardinal Health is unable to manufacture
such products or unable to obtain the means to do so within a
reasonable time frame. Under the supply agreement, we are
committed to pay Cardinal Health a minimum profit share of
$4.0&nbsp;million, $3.0&nbsp;million and $3.0&nbsp;million
during the contract years ending March&nbsp;31, 2005, 2006 and
2007, respectively. As of December 2004, we had already met the
contract minimum for the contract year ending March&nbsp;31,
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;&nbsp;&nbsp;&nbsp;&nbsp;
In March 2004, we entered into a development and license
agreement with PD, an affiliate of JMED, in which we licensed
intellectual property related to a potential product candidate.
Pursuant to this agreement, we paid PD $1.3&nbsp;million. Under
our agreement with PD, upon a change of control, which includes
this offering, PD has the right to exchange the appraised fair
market value of all of its economic interest, which includes an
on-going royalty interest, in the licensed products into shares
of our common stock. The agreement imposes certain requirements
on the parties, but these requirements have been suspended by an
amendment to the agreement. Under the amendment, we have until
August&nbsp;31, 2005 to determine if we wish to go forward with
the agreement. If we decide not to go forward, we have agreed to
pay PD $500,000 and the agreement will terminate. In the event
we close this offering prior to the time we have made an
election whether to go forward, we have agreed to issue to
PD&nbsp;shares of our common stock worth $500,000, valued at the
public offering price, as an advance against obligations under
our agreement. After this offering, we will have the option
until August&nbsp;31, 2005 of going forward with this agreement.
If we do go forward with the agreement, the parties have agreed
to negotiate in good faith to modify certain terms of the
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;&nbsp;&nbsp;&nbsp;&nbsp;
In December 2004, we entered into an agreement with JMED for the
assignment of the AlleRx&#174; license agreement to Cornerstone
Biopharma, Inc., or Cornerstone, and we paid JMED
$2.0&nbsp;million in conjunction with that assignment in January
2005. In connection with the PD license agreement, JMED was
granted the right to convert its on-going royalty interest in
the AlleRx&#174; product into our common
</DIV>

<P align="center" style="font-size: 10pt;">39

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<DIV align="left" style="font-size: 10pt;">
stock in the event of a public offering or change of control.
The assignment of the JMED agreement to Cornerstone provided
that JMED had the right to exchange its royalty interest for our
common stock, as outlined under the PD license agreement. The
valuation of the on-going royalty will be performed by an
outside appraisal firm prior to March&nbsp;31, 2005. To the
extent that the final appraisal exceeds the $2.0&nbsp;million
previously paid, JMED will have the right to convert such excess
into our common stock at the public offering price. Upon
conversion of JMED&#146;s royalty interest into our common
stock, we will become the recipient of future royalties earned
under the license agreement. If JMED does not elect to convert
the excess royalty interest into our common stock, JMED will
continue to collect royalties under the license agreement, and
we will be paid 40% of such royalties up to a maximum of
$1.0&nbsp;million. We have agreed to guarantee the royalty
payments due to JMED from Cornerstone through the date of a
change of control or public 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;&nbsp;&nbsp;&nbsp;&nbsp;
In February 2005, we entered into an agreement with Cornerstone
in which we received the Humibid trademarks from Cornerstone and
Cornerstone received the AlleRx&#174; trademarks from us.
Additionally, the parties released each other from all claims
and damages in a lawsuit that we filed against Cornerstone in
2004. As part of this arrangement, we are contractually
obligated to assume the financial responsibility for the first
$1.0&nbsp;million of returned AlleRx&#174; product that was sold
by us prior to February&nbsp;15, 2005 and returned to
Cornerstone during the 18&nbsp;month period beginning
February&nbsp;15, 2005. Conversely, Cornerstone is financially
responsible for the first $1.0&nbsp;million of Humibid product
returns for the same 18-month period. After the
$1.0&nbsp;million threshold is met, we will have the
responsibility for all Humibid product returns whether sold by
us or Cornerstone and Cornerstone will bear the same liability
for AlleRx&#174; products. In connection with this agreement, we
are obligated to pay to Cornerstone a royalty ranging from 1% to
2% of net Humibid sales for a period of three years after
February&nbsp;15, 2005, with an annual minimum royalty payment
of $50,000.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with the settlement that we reached with CellTech
during April 2004, we agreed to pay to CellTech royalties on
sales of our Mucinex products, subject to an annual maximum of
$500,000 and an annual minimum of $200,000 until
December&nbsp;31, 2013.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During fiscal year 2004, Cardinal Health&#146;s supplier of
dextromethorphan, an active ingredient in Mucinex DM, notified
Cardinal Health that they will be exiting the dextromethorphan
manufacturing business. At such time, Cardinal Health requested
of the supplier, and the supplier agreed, to commit to supplying
Cardinal Health with an approximate four-year supply of
dextromethorphan. However, based upon our recent Mucinex DM
sales activity, we believe that as of December&nbsp;31, 2004,
the remaining supply will meet our needs through December 2006.
Cardinal Health has made a commitment to the dextromethorphan
supplier and is obligated to take delivery of the material over
the course of three years beginning in September 2004. We have
provided Cardinal Health with a letter agreement, dated
September&nbsp;30, 2004, stating that we will reimburse Cardinal
Health for Cardinal Health&#146;s cost in obtaining any unused
quantities of dextromethorphan at the first to occur of
(i)&nbsp;expiration of the material or (ii)&nbsp;six years from
the date of the letter agreement. Furthermore, we are actively
pursuing alternative sources of material suppliers for
dextromethorphan. As of December&nbsp;31, 2004, the remaining
commitment is approximately $2.8&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;&nbsp;&nbsp;&nbsp;&nbsp;
Cardinal Health obtains all of the guaifenesin for our products
from a single supplier, Boehringer Ingelheim. According to
Cardinal Health&#146;s agreement with Boehringer Ingelheim,
which expires in June 2006, Cardinal Health must purchase all of
the guaifenesin used in Mucinex SE and at least 90% of the
guaifenesin used in our products produced under all subsequent
NDAs.
</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>Off-Balance Sheet Arrangements</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;&nbsp;&nbsp;&nbsp;&nbsp;
We do not have any off-balance sheet arrangements.
</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>Quantitative and Qualitative Disclosures about Market
Risk</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our excess cash is invested in short-term U.S.&nbsp;government
securities, high quality money market instruments and corporate
debt. These instruments have various short-term maturities. We
hold no derivative
</DIV>

<P align="center" style="font-size: 10pt;">40

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<DIV align="left" style="font-size: 10pt;">
financial instruments and we do not currently engage in hedging
activities. Accordingly, due to the maturity and credit quality
of our investments, we are not subjected to any substantial risk
arising from changes in interest rates, currency exchange rates
and commodity and equity prices. We do not have any outstanding
debt.
</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>Recent Accounting Pronouncements</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>SFAS&nbsp;No.&nbsp;150.</I> In May 2003, the FASB issued
SFAS&nbsp;No.&nbsp;150, <I>Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
</I>(SFAS&nbsp;150). SFAS&nbsp;No.&nbsp;150 essentially requires
issuers to classify as liabilities certain types of financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity to be classified
as liabilities. Our preferred stock is contingently redeemable
at the option of the holder and therefore is classified outside
of stockholders&#146; equity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>FASB Interpretation No.&nbsp;46.</I> In January 2003, the
FASB issued FASB Interpretation No.&nbsp;46, <I>Consolidation of
Variable Interest Entities</I> (FIN&nbsp;46), which addresses
the consolidation of business enterprises (variable interest
entities) to which the usual condition (ownership of a majority
voting interest) of consolidation does not apply. The
interpretation focuses on financial interests that indicate
control. It concludes that in the absence of clear control
through voting interests, a company&#146;s exposure (variable
interest) to the economic risks and potential rewards from the
variable interest entity&#146;s assets and activities are the
best evidence of control. Variable interests are rights and
obligations that convey economic gains or losses from changes in
the values of the variable interest entity&#146;s assets and
liabilities. Variable interests may arise from financial
instruments, service contracts, nonvoting ownership interests,
and other arrangements. If an enterprise holds a majority of the
variable interests of an entity, it would be considered the
primary beneficiary. The primary beneficiary would be required
to include the assets, liabilities and the results of operations
of the variable interest entity in its financial statements. In
December 2003, the FASB issued a revision to FIN&nbsp;46 to
address certain implementation issues. We do not have any
variable interest entities. Accordingly, the adoption of
FIN&nbsp;46 and FIN&nbsp;46 (revised)&nbsp;had no impact on our
results of operations, financial position or cash flows.
</DIV>

<P align="center" style="font-size: 10pt;">41

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<DIV align="left" style="font-size: 10pt;">
<A name='110'></A>
</DIV>

<!-- link1 "MARKET, RANKING AND OTHER 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>MARKET, RANKING AND OTHER 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;&nbsp;&nbsp;&nbsp;&nbsp;
The data included in this prospectus regarding market share,
historical sales, market size, and ranking, including our
position and the position of our competitors within these
markets, are based on data generated by the independent market
research firms Information Resources, Inc., or IRI, and IMS
Health Incorporated, or IMS Health.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
IRI data reports retail sales in the food, drug and mass
merchandise markets. IRI data for the mass merchandise market,
however, does not include Wal-Mart, which ceased providing sales
data to IRI in 2001. Although Wal-Mart represents a significant
portion of the mass merchandise market for us, as well as our
competitors, we believe that Wal-Mart&#146;s exclusion from IRI
data does not significantly change our market share or ranking
relative to our competitors. As used in this prospectus, the OTC
cough, cold, allergy, and sinus market includes both the cold,
allergy, sinus and the cough syrup segments as reported by IRI.
We believe our current and future products compete against
products comprising both of these segments as reported by IRI.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
IMS Health reports data from various sources including drug
manufacturers, wholesales, retailers, pharmacies, mail order,
long-term care facilities, and hospitals. We rely on IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>
for prescription and sales data related to our products and IMS
Health-National Sales
Perspectives<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>
for sales information related to the non-retail sector of our
business. This prescription and non-retail data is not reported
in the data we receive from IRI.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have not independently verified any of the data from these
third party sources. Therefore, we can offer no assurance as to
the accuracy or completeness of included information.
</DIV>

<P align="center" style="font-size: 10pt;">42

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<DIV align="left" style="font-size: 10pt;">
<A name='111'></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: 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;&nbsp;&nbsp;&nbsp;&nbsp;
We are a specialty pharmaceutical company focused on the
late-stage development, commercialization and marketing of
over-the-counter, or OTC, and prescription pharmaceuticals for
the treatment of respiratory disorders. We currently market two
OTC products under our Mucinex brand and expect to launch four
additional products that are already approved by the
U.S.&nbsp;Food and Drug Administration, or the FDA, over the
next two 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;&nbsp;&nbsp;&nbsp;&nbsp;
Mucinex&nbsp;SE, launched in July 2002, is a long-acting,
single-ingredient guaifenesin product. Guaifenesin is an
expectorant that thins bronchial secretions and makes coughs
more productive. Guaifenesin has an established clinical
acceptance. Mucinex DM, launched in August 2004, combines
long-acting guaifenesin with the cough suppressant
dextromethorphan. According to IRI, for the 52-week period ended
January&nbsp;23, 2005, Mucinex was the seventh best-selling
brand of the 168 brands in the cough, cold, allergy, and sinus
market, based on retail dollar 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;&nbsp;&nbsp;&nbsp;&nbsp;
For the fiscal year ended June&nbsp;30, 2004, our revenues were
$61.3&nbsp;million and our net income was $35.8&nbsp;million
(including a tax benefit of $16.1&nbsp;million related primarily
to the future benefit of our net operating loss). This
represents a 337% growth in revenues over the fiscal year ended
June&nbsp;30, 2003. For the six months ended December&nbsp;31,
2004, our revenues were $62.0&nbsp;million and our net income
was $9.2&nbsp;million, representing a 129% increase in revenues
over the six months ended 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;&nbsp;&nbsp;&nbsp;&nbsp;
The FDA has approved additional long-acting guaifenesin products
that we have developed. Mucinex D, approved in June 2004,
combines long-acting guaifenesin with the decongestant
pseudoephedrine. Also, the FDA has approved three maximum
strength products: a single-ingredient guaifenesin product; a
guaifenesin/dextromethorphan combination product; and a
guaifenesin/pseudoephedrine combination product. Each of these
maximum strength products has twice the amount of active
ingredients as its Mucinex counterpart. We expect to launch
Mucinex&nbsp;D and Humibid, our maximum strength,
single-ingredient guaifenesin product, in the first quarter of
2006, and the remaining maximum strength formulations in the
second half of 2006. We are currently working on the development
of two additional OTC products and one new prescription product,
each of which combines long-acting guaifenesin with other active
ingredients.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
All of our Mucinex products and their maximum strength versions
are based on our patented delivery system for guaifenesin. Our
delivery system has an immediate release component to provide
rapid relief from excess mucus and an extended-release component
to provide a 12-hour effect. We intend to utilize this delivery
system technology in other OTC and prescription products to
treat additional respiratory disorders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Mucinex SE, Mucinex DM and Mucinex D and their maximum strength
versions are the only long-acting guaifenesin products approved
by the FDA. The FDA&#146;s policy is to remove unapproved
products from the market once a similar product has been
approved. Following approval of Mucinex&nbsp;SE, the FDA took
enforcement action to remove all other long-acting,
single-ingredient guaifenesin products from the market in
December 2003. Based on IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>
data, we estimate that, for the 12&nbsp;months ended
June&nbsp;30, 2003, approximately 10.5&nbsp;million
prescriptions were dispensed for competing long-acting,
single-ingredient guaifenesin products. Mucinex SE is now the
only product available to meet this demand, and we believe that
we have switched the majority of these prescriptions to OTC
sales of Mucinex SE. Based on IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>
data, we estimate that, for the 12&nbsp;months ended
June&nbsp;30, 2003, approximately 14.5&nbsp;million
prescriptions were dispensed for products containing long-acting
guaifenesin in combination with dextromethorphan or
pseudoephedrine. If the FDA removes competitive unapproved
products under its policy, Mucinex&nbsp;DM and Mucinex&nbsp;D,
when introduced, would be the only products available to meet
this demand. If the FDA removes these unapproved products from
the market, we believe a majority of the prescriptions currently
dispensed for those products would be switched to OTC sales of
Mucinex&nbsp;DM and Mucinex&nbsp;D.
</DIV>

<P align="center" style="font-size: 10pt;">43
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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;&nbsp;&nbsp;&nbsp;&nbsp;
We believe the approval of Mucinex SE, Mucinex DM and Mucinex D
as OTC products represents an opportunity to introduce
long-acting guaifenesin and combination products into a larger
OTC market where guaifenesin was previously only available in
short-acting form. We believe, based on IRI data, that the
current OTC cough, cold, allergy, and sinus market is
approximately 17 times the size of the prescription market for
products similar to our approved products, based on units sold
for the 12&nbsp;months ended June&nbsp;30, 2003.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
We employ a dual marketing approach to take advantage of the
former prescription status of the long-acting guaifenesin market
and the OTC opportunity. Our 100-person professional sales force
attempts to educate physicians and other healthcare
professionals about the benefits of long-acting guaifenesin
products and encourages these physicians and other healthcare
professionals to recommend our products to their patients. Our
sales force also seeks to educate pharmacists about our products
and encourage them to recommend Mucinex to customers. We
launched a consumer advertising campaign to reach the consumer
market through television, print and radio advertising to
increase consumer trial and awareness of the Mucinex brand. Our
focused positioning is embodied in our tag line &#147;Mucinex
In, Mucus Out&#148; and our message is communicated through an
animated character called &#147;Mr.&nbsp;Mucus.&#148;
</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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table shows the retail tablet sales of Mucinex SE,
based on data from IRI, as well as the effects of the FDA&#146;s
removal of products competitive with Mucinex SE from the market
and our consumer advertising campaign:
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<IMG src="y06044y0604401.gif" alt="(LINE CHART)">
</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 Respiratory Therapeutics Market</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Market Overview.</I> Respiratory disorders include serious
conditions such as emphysema, pneumonia, chronic obstructive
pulmonary disease (COPD),&nbsp;and chronic bronchitis for which
patients seek professional medical treatment, as well as less
serious disorders, including the common cold, sinusitis,
bronchitis, and allergy, which patients often diagnose and treat
by themselves. Likewise, respiratory therapeutics range from
prescription pharmaceuticals prescribed by a physician to OTC
pharmaceuticals that are purchased by the consumer, often as the
result of a physician&#146;s or pharmacist&#146;s
recommendation. According to IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>
and IMS Health-National Sales
Perspectives<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>,
in 2004, the prescription market in the United States for all
respiratory disorders was approximately $13.4&nbsp;billion while
the prescription cough and cold market in the United States was
approximately $1.3&nbsp;billion. According to IRI, consumers
spent approximately $2.6&nbsp;billion on OTC cough, cold,
allergy, and sinus remedies during the 52&nbsp;weeks ended
January&nbsp;23, 2005.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
Respiratory disorders have different causes and symptoms, but
the production of excess or thick mucus is a common factor in
many respiratory disorders. Mucus often exacerbates respiratory
disorders such as acute respiratory infections, bronchitis,
common cold, cough, and sinusitis. Guaifenesin, the principal
active ingredient in our products, is the only FDA-approved
expectorant. It helps loosen mucus and thin bronchial secretions
to rid the bronchial passageways of bothersome mucus and make
coughs
</DIV>

<P align="center" style="font-size: 10pt;">44

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<DIV align="left" style="font-size: 10pt;">
more productive. Guaifenesin is available in both long-acting
and short-acting formulations and as a single ingredient or in
combination with other active ingredients. Long-acting
formulations are typically in tablet form and dosed every
12&nbsp;hours. Short-acting or immediate release formulations
are often in liquid form and are dosed every 4 to 6&nbsp;hours.
Historically, the long-acting formulations were available in the
United States by prescription only, while short-acting
formulations were available OTC.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>The Long-Acting Guaifenesin Market.</I> Physicians prescribe
single-ingredient and combination long-acting guaifenesin
products to address the excess mucus associated with respiratory
disorders such as acute respiratory infections, bronchitis,
common cold, cough, and sinusitis. Based on data from IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>,
we estimate that approximately 25&nbsp;million prescriptions
were dispensed for long-acting, single-ingredient and
combination guaifenesin products containing dextromethorphan or
pseudoephedrine for the 12&nbsp;months ended June&nbsp;30, 2003.
According to IMS Health-National Disease and Therapeutic
Index<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>,
these prescriptions were often written in combination with an
antibiotic.
</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="78%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
</TR>

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

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Prescriptions</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 style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(in&nbsp;millions)</B></TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Single-ingredient Guaifenesin</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Guaifenesin and Dextromethorphan HBr (Cough Suppressant)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Guaifenesin and Pseudoephedrine HCl (Decongestant)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11.5</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;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that, based on data from IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>,
approximately 91% of all prescriptions for long-acting,
single-ingredient and combination guaifenesin were historically
filled with generic drugs. Branded long-acting guaifenesin
products were not actively promoted despite the fact that
doctors routinely prescribed certain brand names. We believe
that the brand name with the most recognition in the market was
Humibid, for which approximately 2.8&nbsp;million prescriptions
were written during 2003, according to IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>.
We acquired the Humibid brand in February 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>The OTC Cough, Cold, Allergy, and Sinus Market.</I> According
to the American Lung Association, adults contract two to four
colds per year primarily between September and May. The OTC
&#147;cough, cold, allergy, and sinus&#148; market includes
products that consumers purchase over the counter to address
mild respiratory disorders such as the common cold, cough and
allergic rhinitis. These mild respiratory disorders often have
multiple symptoms including nasal, sinus and bronchial
congestion, cough, runny nose, and fever. Many of these products
contain more than one active ingredient in order to be effective
against several different cough and cold symptoms. Guaifenesin,
in short-acting formulations, is an ingredient in many of these
cough and cold OTC 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;&nbsp;&nbsp;&nbsp;&nbsp;
Familiar brand names in the OTC cough, cold, allergy, and sinus
market include Vicks&#174; (Dayquil&#174;/ Nyquil&#174;),
Tylenol&#174;, Benadryl&#174;, Sudafed&#174;, Claritin&#174;,
and Robitussin&#174;. These products generally contain active
ingredients such as acetaminophen, dextromethorphan,
diphenhydramine, guaifenesin, loratidine, phenylephrine, and
pseudoephedrine. This market is fairly fragmented with seven
brands, including our Mucinex products, accounting for 51% of
dollar sales during the 52-week period ended January&nbsp;23,
2005, according to IRI. During this same period, according to
IRI, private label products represented 24% of this market. We
believe, based on IRI data, that the OTC cough, cold, allergy,
and sinus market is approximately 17 times the size, in terms of
units, of the 25&nbsp;million prescription market for products
similar to our approved products.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Mucinex SE is the Only Long-Acting, Single-Ingredient
Guaifenesin Product Available in the United States.</I> In
December 2003, the FDA removed all competing long-acting,
single-ingredient guaifenesin products from the
U.S.&nbsp;market. As a result, Mucinex SE is now the exclusive
FDA-approved, long-acting, single-ingredient expectorant
available in the United States. Due to our exclusive position
and professional and consumer promotional efforts, net sales of
Mucinex&nbsp;SE increased from $4.5&nbsp;million during the
fiscal year ended June&nbsp;30, 2003 to $52.9&nbsp;million
during the fiscal year ended June&nbsp;30, 2004.
</DIV>

<P align="center" style="font-size: 10pt;">45

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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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Strength of the Mucinex Brand.</I> On November&nbsp;15, 2004,
we launched a television, print and radio advertising campaign
to build awareness of the Mucinex brand in the consumer market.
The table below identifies brand rank and market share by dollar
sales for the leading brands in the OTC cough, cold, allergy,
and sinus market, as reported by IRI for the 52, 12 and
four&nbsp;weeks ended January&nbsp;23, 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="3%">&nbsp;</TD>
    <TD width="18%">&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="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="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Brand Rank&nbsp;(1)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Market Share&nbsp;(1)</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="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>52 Weeks</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>12&nbsp;Weeks</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>4&nbsp;Weeks</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>52&nbsp;Weeks</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>12&nbsp;Weeks</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>4&nbsp;Weeks</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2" align="center" nowrap><B>Brand</B></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>Ended</B></TD><TD></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>Ended</B></TD><TD></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>Ended</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>
    <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">
    Private label</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>23.5</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21.5</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20.9</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">
    Claritin&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.5</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">
    Tylenol&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Vicks&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11.5</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">
    Robitussin&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.5</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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Benadryl&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.1</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">
    Sudafed&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.9</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Mucinex</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><B>7</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><B>6</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><B>5</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><B>2.8</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><B>4.9</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><B>5.7</B></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">
    Alka Seltzer Plus&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Alavert&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.8</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">
    Advil&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Triaminic&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.1</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">
    Theraflu&#174;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Others</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom" nowrap>13 through 168</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom" nowrap>13 through 158</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom" nowrap>13 through 151</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15.6</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" 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 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>
    <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>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</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" 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; 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: 8pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Includes products sold in the OTC cough, cold, allergy, and
    sinus market and does not include other products marketed under
    these brand names.</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;&nbsp;&nbsp;&nbsp;&nbsp;
In June 2004, Mucinex SE was recognized by NACDS Marketplace as
the best new product in the &#147;Healthcare/ OTC&#148;
category. Later in 2004, Mucinex SE was voted the&nbsp;#1 new
product in the &#147;Cough/ Cold/ Allergy&#148; category at the
Retail Excellence Awards hosted by Drug Store News. We believe
professional and consumer awareness of the Mucinex brand
provides a significant foundation for our planned Mucinex line
extensions and will help us grow our market share and achieve
long-term profitability.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Our Patented Guaifenesin Delivery System Provides a Platform
for the Introduction of Additional Respiratory Products.</I> All
of our current products utilize our patented delivery system,
which has an immediate release component of guaifenesin to match
the effects of an immediate release product and an
extended-release component for long-lasting effect. We intend to
utilize this technology in products that combine guaifenesin
with other ingredients to address other respiratory ailments. We
are currently developing three additional products that utilize
our patented guaifenesin delivery system and combine long-acting
guaifenesin with other active ingredients.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Integrated Effort in Both the Prescription and OTC
Marketplace.</I> We believe that our experience in the
late-stage development of OTC and prescription products and in
marketing products to both consumers, in the case of OTC
products, and healthcare professionals, in the case of
prescription and OTC products, gives us a unique perspective on
product development opportunities and commercialization
strategies. We consider factors such as the expected timing of
regulatory approvals, costs of effective promotion and likely
competitive landscape in determining how to best position and
most efficiently bring our products to market. We believe this
perspective allows us to identify and evaluate new products and
determine whether they are most suitable for the prescription or
OTC market. We believe that our dual
</DIV>

<P align="center" style="font-size: 10pt;">46

<!-- 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;">
market perspective combined with our professional sales force
and the versatility of our guaifenesin delivery system
technology enables us to integrate our efforts in the
prescription and OTC marketplaces.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Experienced Senior Management Team with Proven Ability to
Develop and Grow Brands.</I> Our senior management team has over
60&nbsp;years of combined prescription and consumer
pharmaceutical experience in product and brand development,
commercialization, marketing, and sales. Members of our senior
management team have launched and/or managed many well known
brands within the OTC cough, cold, allergy, and sinus market,
including Sudafed&#174;, Benadryl&#174;, Actifed&#174;,
Theraflu&#174;, Triaminic&#174;, Pediacare&#174;, Tavist&#174;,
and Sinutab&#174;. Members of our team also have managed or been
involved in the development and marketing of well known
prescription brands, including Accupril&#174;, Asacol&#174;,
Dilantin&#174;, Helidac&#174;, Lopid&#174;, and Otrivin&#174;.
We believe that this combined consumer and pharmaceutical
experience is unique among specialty pharmaceutical companies of
similar size.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our goal is to be a leading specialty pharmaceutical company
with a focus on respiratory therapeutics by building
market-leading brands in the OTC and prescription markets. The
key elements of our strategy to achieve this goal are to:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Continue to Switch Prescriptions for Long-Acting Guaifenesin
    into Retail Sales of Our Products.</I> Based on data from IMS
    Health-NPA<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>,
    during the 12&nbsp;months ended June&nbsp;30, 2003, an estimated
    10.5&nbsp;million long-acting, single-ingredient guaifenesin
    prescriptions were written by physicians and dispensed by
    pharmacists. As a result of the FDA&#146;s removal of all
    competing long-acting, single-ingredient guaifenesin products
    from the U.S.&nbsp;market in December 2003, Mucinex SE is now
    the only long-acting guaifenesin product available in the United
    States. Despite the FDA&#146;s removal of the unapproved
    products from the market, physicians continue to write
    prescriptions for these products. In order to switch
    prescriptions for these guaifenesin products to physician
    recommendations for Mucinex&nbsp;SE and Mucinex&nbsp;DM, our
    100-person internal professional sales force details our Mucinex
    products to the approximately 25,000 physicians who have
    traditionally written the majority of long- acting guaifenesin
    prescriptions.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Expand the Market by Educating Healthcare Professionals about
    the Benefits of Long-Acting Guaifenesin.</I> The prescription
    market for long-acting guaifenesin historically consisted
    primarily of generic products. As a result, physicians,
    pharmacists and other healthcare professionals were not
    regularly detailed about the benefits of long-acting
    guaifenesin. Our sales force seeks to educate these
    professionals as to the therapeutic value of long-acting
    guaifenesin, in an effort to expand the market for our current
    and future products. We have also organized a panel of leading
    physicians specializing in respiratory care to study the use of
    long-acting guaifenesin products and to further establish the
    products as valuable therapeutic agents in the field.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Build the Mucinex Brand in the Consumer Market.</I> While
    guaifenesin in short-acting formulations is a common ingredient
    in numerous OTC cough, cold, allergy, and sinus remedies,
    long-acting guaifenesin was available only by prescription until
    the FDA&#146;s approval of Mucinex SE as an OTC product.
    According to IRI, for the 52-week period ended January&nbsp;23,
    2005, the retail OTC market for cough, cold, allergy, and sinus
    remedies was approximately $2.6&nbsp;billion. Our consumer
    advertising strategy is to educate consumers about the unique
    benefits of Mucinex and encourage consumers to try our products.
    We seek to position Mucinex as the preferred brand for relief
    from congestion due to excess mucus, a symptom common to most
    respiratory ailments. Our current advertising campaign features
    an animated character called &#147;Mr.&nbsp;Mucus&#148; and the
    tag-line &#147;Mucinex In, Mucus Out.&#148; We believe this
    focused campaign will expand consumer awareness of Mucinex and
    create a sustainable brand. A recent survey we sponsored
    demonstrates that after use of a Mucinex product, 82% of those
    surveyed indicate that they will definitely or probably purchase
    a Mucinex product again.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">47

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<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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Launch New Products Under Our Existing Brands.</I> We seek to
    capture a larger share of the OTC cough, cold, allergy, and
    sinus market by launching new products under our Mucinex and
    Humibid brands. Our first three line extensions are
    Mucinex&nbsp;DM, Mucinex&nbsp;D and Humibid, which incorporate
    our patented technology for long-acting guaifenesin. We intend
    to launch Mucinex&nbsp;D and Humibid in the first quarter of
    2006 and the maximum strength versions of our guaifenesin
    combination products in the second half of 2006.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Develop Prescription Respiratory Products.</I> We intend to
    apply our patented technology to long-acting guaifenesin in
    combination with prescription active ingredients in future
    products. We intend to use this strategy to enter new
    prescription respiratory market segments. We are currently
    considering a number of product candidates in these and other
    categories. We intend to use our existing professional sales
    force to market these products to physicians we currently target.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Continue to In-License or Acquire Pharmaceutical Respiratory
    Products and Brands.</I> We intend to expand our product
    portfolio by selectively in-licensing or acquiring prescription
    or OTC products in the respiratory market. We will focus on
    prescription products in the later stages of development that
    can be sold through our existing sales force. We will also focus
    on brands in the cough, cold, allergy, and sinus market that we
    believe we can grow. As part of this strategy, we acquired the
    Humibid brand, historically a strong brand in the long-acting
    prescription guaifenesin marketplace. We believe this brand will
    provide us with a platform from which to launch the maximum
    strength version of our products and to take advantage of the
    awareness the Humibid brand enjoys among physicians, pharmacists
    and other healthcare professionals. In addition, we are
    evaluating respiratory prescription products available outside
    the United States, which we may license and seek FDA approval to
    introduce in the U.S.&nbsp;market.</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 Products</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="35%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="13%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="12%">&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="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&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="2" align="center" nowrap><B>12&nbsp;Months Ended</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="2" align="center" nowrap><B>December&nbsp;31, 2004</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Product</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Active Ingredients</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Launch Year</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Net Sales</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>
</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="2" align="center" nowrap><B>(in millions)</B></TD><TD></TD>
</TR>

<TR bgcolor="#36A392">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mucinex SE</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>600&nbsp;mg guaifenesin</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>77.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mucinex DM</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>600&nbsp;mg guaifenesin/</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>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>30&nbsp;mg dextromethorphan HBr</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11.6</TD>
    <TD>&nbsp;</TD>
</TR>

<TR bgcolor="#36A392">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mucinex D</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>600&nbsp;mg guaifenesin/</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="#36A392">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>60&nbsp;mg pseudoephedrine HCl</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2006*</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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Humibid</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>1200&nbsp;mg guaifenesin</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2006*</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 bgcolor="#36A392">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Maximum Strength DM</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>1200&nbsp;mg guaifenesin/</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="#36A392">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>60&nbsp;mg dextromethorphan HBr</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2006*</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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Maximum Strength D</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>1200&nbsp;mg guaifenesin/</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>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>120&nbsp;mg pseudoephedrine HCl</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2006*</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>

</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: 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: 9pt;">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>*&nbsp;</TD>
    <TD align="left">
    Proposed launch 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Mucinex SE.</I> Mucinex&nbsp;SE is an extended-release,
bi-layer tablet containing 600&nbsp;mg of guaifenesin.
Mucinex&nbsp;SE helps loosen phlegm (mucus)&nbsp;and thin
bronchial secretions to rid the bronchial passageways of
bothersome mucus and make coughs more productive. In July 2002,
we received FDA approval of a new drug application, or NDA, for
Mucinex&nbsp;SE. For the fiscal year ended June&nbsp;30, 2004
and the six&nbsp;months ended December&nbsp;31, 2004, our net
sales for Mucinex SE were $52.9&nbsp;million and
$47.3&nbsp;million, respectively. According to IRI, for the
52-week period ended January&nbsp;23, 2005, our Mucinex&nbsp;SE
40 count and 20 count stock keeping units, or SKUs, ranked
number three and five, respectively, among more than one
thousand SKUs in the cough, cold, allergy, and sinus market (in
terms
</DIV>

<P align="center" style="font-size: 10pt;">48

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<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;">
of retail dollar sales). In June 2004, Mucinex&nbsp;SE was
recognized by NACDS Marketplace as the best new product in the
&#147;Healthcare/ OTC&#148; category. Later in 2004, Mucinex SE
was voted the&nbsp;#1 new product in the &#147;Cough/ Cold/
Allergy&#148; category at the Retail Excellence Awards hosted by
Drug Store News.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Mucinex DM.</I> Mucinex DM combines the expectorant
properties of Mucinex&nbsp;SE with the cough suppressant
dextromethorphan. In April 2004, the FDA approved our NDA for
Mucinex&nbsp;DM, which is the only long-acting guaifenesin and
dextromethorphan combination product approved by the FDA. We
launched Mucinex&nbsp;DM during August 2004 and, through
December&nbsp;31, 2004, we have achieved net sales of
$11.6&nbsp;million. According to IRI, for the 12-week period
ended January&nbsp;23, 2005 our Mucinex&nbsp;DM 40 count and 20
count SKUs were the number&nbsp;39 and seven, respectively, SKUs
(in terms of retail dollar 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Mucinex D.</I> Mucinex&nbsp;D adds the decongestant
pseudoephedrine to the expectorant properties of Mucinex SE. In
June 2004, the FDA approved our NDA for Mucinex&nbsp;D, which is
the only long-acting guaifenesin and pseudoephedrine combination
product approved by the FDA. We intend to begin marketing
Mucinex&nbsp;D in the first quarter 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Maximum Strength Guaifenesin Product Line.</I> We have also
received FDA approval for extended-release formulations of
guaifenesin, guaifenesin/dextromethorphan and
guaifenesin/pseudoephedrine at twice the strength of the
approved Mucinex formulations. We also recently acquired the
rights to the Humibid brand. We believe that Humibid was the
most recognized brand in the former prescription long-acting
guaifenesin market. According to IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>,
during 2003, approximately 2.8&nbsp;million prescriptions were
written for Humibid. In the first quarter of 2006, we intend to
launch the maximum strength version of our single-ingredient
guaifenesin product under the Humibid brand and target the
physician community that continues to prescribe Humibid. We also
intend to launch the remaining maximum strength combination
formulations in the second 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>The FDA&#146;s Removal of Competing Products.</I>
Mucinex&nbsp;SE, Mucinex&nbsp;DM and Mucinex&nbsp;D and their
maximum strength versions are the only long-acting guaifenesin
products approved by the FDA. The FDA&#146;s policy is to remove
unapproved products from the market once a similar product has
been approved. Following approval of Mucinex SE, the FDA took
enforcement action to remove other long-acting,
single-ingredient guaifenesin products, all of which were
unapproved products. As a result, Mucinex&nbsp;SE is currently
the exclusive alternative to what we estimate, based on IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>
data, were formerly 10.5&nbsp;million prescriptions dispensed
for long-acting, single-ingredient guaifenesin products. Prior
to the FDA&#146;s enforcement action, physicians continued to
prescribe and pharmacies continued to dispense long-acting,
single-ingredient guaifenesin as prescription products, and we
believe less than 5% of the prescriptions written resulted in
retail sales of Mucinex&nbsp;SE, despite Mucinex&nbsp;SE being
the only FDA-approved product. After the FDA&#146;s enforcement
action, we believe that a majority of physician prescriptions
for long-acting, single-ingredient guaifenesin were switched to
retail sales of Mucinex&nbsp;SE. If the FDA were to enforce its
policy on products containing long-acting guaifenesin in
combination with dextromethorphan or pseudoephedrine, all of
which are unapproved, we believe a majority of the estimated
14.5&nbsp;million prescriptions, based on IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>
data, currently dispensed for those products would be switched
to OTC sales of Mucinex&nbsp;DM and Mucinex&nbsp;D, when
introduced.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Product Pipeline.</I> We are developing additional OTC and
prescription products for the respiratory market utilizing our
patented delivery system for guaifenesin. We are currently
working on the development of three additional products
combining guaifenesin with other active ingredients to treat
prevalent respiratory disorders. We have developed formulations
for these products and one of the products is undergoing
clinical testing. In addition, we are actively reviewing
opportunities to in-license or acquire prescription products for
the respiratory markets.
</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 Sales and Marketing 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;&nbsp;&nbsp;&nbsp;&nbsp;
We utilize a dual marketing strategy for our Mucinex products.
We seek to capitalize on the historic prescription nature of the
market for long-acting, single-ingredient and combination
guaifenesin
</DIV>

<P align="center" style="font-size: 10pt;">49
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<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;">
products by continuing to develop physician and pharmacist
support for long-acting guaifenesin and combination products. We
also introduced our Mucinex products to consumers in an effort
to expand the available market and capture a meaningful share of
the OTC cough, cold, allergy, and sinus market, which, we
believe, based on IRI data, is approximately 17 times the size,
in terms of units, of the 25&nbsp;million prescription market
for products similar to our approved 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Professional Marketing.</I> Our physician marketing efforts
focus primarily on primary care and respiratory specialist
physicians such as allergists and otolaryngologists, or ear,
nose and throat doctors. We estimate, based on IMS
Health-NPA<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>
data, that, for the 12&nbsp;months ended June&nbsp;30, 2003,
approximately 13.5&nbsp;million prescriptions were dispensed for
prescription single-ingredient and combination guaifenesin
products similar to our Mucinex&nbsp;SE and Mucinex&nbsp;DM. We
believe approximately 25,000 physicians wrote&nbsp;60% of these
prescriptions. With our 100-person sales force, we are able to
effectively market Mucinex&nbsp;SE and Mucinex&nbsp;DM to
approximately 80% of these physicians and encourage them to
write recommendations for our products. In addition, many
physicians continue to write prescriptions for long-acting,
single-ingredient guaifenesin despite its OTC status. This trend
continues even though the former prescription products have been
removed from the market as a result of the FDA action. We
believe these prescriptions routinely result in
pharmacist-directed sales of Mucinex.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Because the prescription market for long-acting guaifenesin was
91% generic, based on data from
IMS&nbsp;Health-NPA<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>,
we believe long-acting guaifenesin was not actively promoted.
Our professional marketing campaign attempts to educate
physicians, pharmacists and other healthcare professionals on
the benefits of our products to encourage them to recommend our
products to their patients and customers. As we develop
additional respiratory products, we intend to utilize and
further expand our sales force to market these products to
physicians. We have also organized a panel of leading physicians
specializing in respiratory care to study the use of long-acting
guaifenesin products and to further establish the products as
valuable therapeutic agents in the field.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Consumer Marketing.</I> In November 2004, we launched our
advertising campaign featuring &#147;Mr.&nbsp;Mucus&#148; and
utilizing the tag line &#147;Mucinex In, Mucus Out.&#148; The
launch of this campaign coincided with the traditional onset of
the cough and cold season in the United States. We believe this
campaign communicates the effectiveness of Mucinex in relieving
chest congestion by removing excess mucus and will expand
consumer awareness of the Mucinex brand. One way we gauge the
effectiveness of our advertising campaign is by measuring aided
brand awareness. Aided brand awareness is a consumer&#146;s
ability to identify our product after being told the
product&#146;s name. Based on research we sponsored, aided brand
awareness has increased from 14% prior to the launch of our
advertising campaign to 55% for the four weeks ended
March&nbsp;5, 2005. Retail sales have continued to climb
steadily throughout the season.
</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>Trade Sales 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;&nbsp;&nbsp;&nbsp;&nbsp;
Our customers consist of drug wholesalers, retail drug stores,
mass merchandisers, and grocery stores in the United States. We
believe that each of these channels is important to our business
and we continue to seek opportunities for growth in each sector.
The following table sets forth the percentage of gross sales for
all of our customers for the last two fiscal years and the six
months ended December&nbsp;31, 2004 across our major
distribution channels:
</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="61%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&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>Percentage of Gross Sales</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>Six Months Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

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

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Wholesale Drug</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>39.30</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>69.49</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>89.83</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Drug</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33.75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18.70</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.59</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mass</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15.06</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.96</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.82</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Food</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11.36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.71</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <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>0.52</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.68</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.05</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">50

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<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;&nbsp;&nbsp;&nbsp;&nbsp;
Certain drug wholesale customers distribute our products in
non-retail institutions, such as federal facilities, long-term
care facilities, hospitals, clinics, and HMOs. For the
12&nbsp;months ended December&nbsp;31, 2004, based on IMS
Health-National Sales
Perspectives<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>
data, we believe approximately 19% of our sales were directed to
non-retail channels.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our top 10 customers account for approximately 91% of our gross
sales for the fiscal year ended June&nbsp;30, 2004 and 82% of
our gross sales for the six&nbsp;months ended December&nbsp;31,
2004. The following table sets forth a list of our primary
distribution channels and our principal customers for each
channel:
</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="22%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Channel of Distribution</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" nowrap><B>Customers</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 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">
    Wholesale Drug</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    AmerisourceBergen<BR>
    Cardinal Health<BR>
    McKesson*</TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Drug</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    CVS*<BR>
    Eckerd<BR>
    Rite Aid<BR>
    Walgreens*</TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Food</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Albertsons<BR>
    Kroger<BR>
    Safeway</TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mass</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Kmart<BR>
    Target<BR>
    Wal-Mart*</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: 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: 8pt;">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>*&nbsp;</TD>
    <TD align="left">
    Represents customers who each accounted for greater than 10% of
    our gross sales for the six months ended December&nbsp;31, 2004.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our trade sales force calls on national and regional retail
accounts and wholesale distribution companies. The primary focus
of our trade sales force is to maximize our shelf presence at
retail drug, food and mass merchandise stores to support the
efforts of our professional sales representatives and consumer
advertising campaign. For the more fragmented food channel and
for smaller chains and individual stores, we rely on a national
network of regional brokers to provide retail support. Our trade
sales force performs analysis that helps both our sales
representatives and our customers understand sales patterns and
create appropriate promotions and merchandising aids for our
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;&nbsp;&nbsp;&nbsp;&nbsp;
Between December 2003 and December 2004, we expanded our trade
sales force from one to six professionals. During that same time
frame, we have expanded our shelf presence at food, drug and
mass merchandiser stores. We believe a product&#146;s importance
to major retailers and attractiveness to consumers can be
measured by the All Commodity Volume Index, or ACV, as reported
by IRI. ACV measures the weighted sales volume of stores that
sell a particular product out of all the stores that sell
products in that market segment generally. We believe that ACV
is a measure of a product&#146;s importance to major retailers.
In the case of our products, ACV measures the percentage of
retailers that sell our products out of all retailers that sell
cough, cold, allergy, and sinus remedies (on a weighted sales
volume basis). The following table summarizes our ACV for each
of our products:
</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="38%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&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="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&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="22" align="center" nowrap><B>ACV 4 Weeks Ended January&nbsp;23,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" 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="10" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" 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="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></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>Drugs</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Food</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Food/Drug/Mass</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Drugs</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Food</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Food/Drug/Mass</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>
    <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">
    Mucinex SE</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>94.2</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53.1</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>78.1</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>65.4</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14.1</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40.4</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mucinex DM</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>84.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>62.2</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>

</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;&nbsp;&nbsp;&nbsp;&nbsp;
In April 2004, we entered into a three-year exclusive
distribution and logistics agreement with Cardinal Health. Under
this agreement, Cardinal Health is responsible for warehouse
inventory operations, logistics, shipping, billing, and customer
collections on a fee-for-service basis.
</DIV>

<P align="center" style="font-size: 10pt;">51

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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>Government Regulation</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;&nbsp;&nbsp;&nbsp;&nbsp;
The manufacturing and marketing of both prescription and OTC
pharmaceutical products in the United States are subject to
extensive regulation by the federal government, primarily the
FDA, under the Federal Food, Drug and Cosmetic Act, or FDCA, the
Controlled Substance Act and other federal statutes and
regulations.
</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>FDA 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;&nbsp;&nbsp;&nbsp;&nbsp;
Most drug products obtain FDA marketing approval pursuant to a
new drug application, or NDA, or an abbreviated new drug
application, or ANDA. A third alternative is a special type of
NDA, commonly referred to as a Section&nbsp;505(b)(2) NDA or
505(b)(2) application, which enables the applicant to rely, in
part, on the safety and efficacy data of an existing product, or
published literature, in support of its application. Our
existing products were approved pursuant to
Section&nbsp;505(b)(2) NDAs, as further described below. While
we may seek approval of future products through any of these
processes, we expect to seek approval for most of our future
products using NDAs and Section&nbsp;505(b)(2) NDAs.
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>New Drug Applications.</I> NDAs are the standard applications
    required for new drug products and require extensive original
    clinical data demonstrating the safety and efficacy of the
    product candidate. Typically, NDAs require three phases of human
    clinical trials. In Phase&nbsp;I, the product candidate is
    introduced into humans and tested for safety, dose ranges and
    pharmacokinetics. In Phase&nbsp;II, the product candidate is
    introduced into a slightly larger patient population to assess
    efficacy for specific indications, assess response rates
    tolerance, determine optimal dose, and identify safety risks and
    adverse effects. In Phase&nbsp;III, the product candidate is
    introduced in an expanded patient population at multiple
    geographically dispersed sites to further test for safety and
    clinical efficacy. In addition, prior to beginning the human
    clinical trial work required for either a NDA or
    Section&nbsp;505(b)(2) NDA, an applicant must obtain approval to
    begin this clinical testing by submitting an Investigational New
    Drug application, or IND, to the FDA, which includes the results
    of preclinical animal studies.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>Abbreviated New Drug Applications.</I> An ANDA is a type of
    application in which approval is based on a showing of
    &#147;sameness&#148; to an already approved drug product. ANDAs
    do not contain full reports of safety and effectiveness as
    required in NDAs but rather demonstrate that their proposed
    products are &#147;the same as&#148; reference products with
    regard to their conditions of use, active ingredients, route of
    administration, dosage form, strength, and labeling. ANDA
    applicants are also required to demonstrate the bioequivalence
    of their products to the reference product. Bioequivalence
    generally means that there is no significant difference in the
    rate and extent to which the active ingredients enter the
    blood-stream and become available at the site of drug action.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    <I>505(b)(2) Applications.</I> If a proposed product represents
    a change from an already approved product, and therefore does
    not qualify for an ANDA, the applicant may be able to submit a
    Section&nbsp;505(b)(2) NDA or 505(b)(2) application. A 505(b)(2)
    application is made pursuant to Section&nbsp;505(b)(2) of the
    FDCA and is a NDA that relies on one or more investigations
    conducted by a party other than the applicant in connection with
    an existing approved product. The FDA has determined that
    505(b)(2) applications may be submitted for products that
    represent changes from approved products in conditions of use,
    active ingredients, route of administration, dosage form,
    strength, or bioavailability. A 505(b)(2) applicant must
    reference an approved product as well as the related safety data
    on which it proposes to rely. The applicant must also provide
    the FDA with any additional clinical data necessary to
    demonstrate the safety and effectiveness of the product with the
    proposed changes. Consequently, while an applicant avoids
    duplication of preclinical and certain clinical safety and
    efficacy studies through the use a 505(b)(2) application, the</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">52

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

<TR>
    <TD width="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    applicant is usually required to perform at least one additional
    human clinical study in support of the application.</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;&nbsp;&nbsp;&nbsp;&nbsp;
In seeking approval for a drug through a NDA or 505(b)(2)
application, applicants are required to list with the FDA each
patent with claims that cover the applicant&#146;s product. Upon
approval of a drug, each of the patents listed in the
application for the drug are then published in the FDA&#146;s
Approved Drug Products with Therapeutic Equivalence Evaluations
list, commonly known as the Orange Book. Applicants that file an
ANDA or 505(b)(2) application must certify, with respect to each
product referenced in their applications, that no patent exists
in the Orange Book for that reference product, that the listed
patents have expired, that the application may be approved upon
the date of expiration of the listed patents, or that the
patents listed in the Orange Book for the reference product are
invalid or will not be infringed by the marketing of the
applicant&#146;s product. When an applicant submits an
application containing a certification that a reference
product&#146;s patents are invalid or not infringed, the
applicant must also provide notice to the owner of the reference
product&#146;s patent. If the owner of the reference product
determines in good faith that the applicant&#146;s product would
infringe a valid patent listed in the Orange Book for the
reference drug and files suit within 45&nbsp;days of receiving
notice of the application, the owner of the reference product is
entitled to a one-time stay of up to 30&nbsp;months to resolve
the issue through litigation. During that time, the FDA will not
approve the applicant&#146;s application. The FDA may approve
the proposed product at the end of 30&nbsp;months or upon an
earlier court determination that the patent is invalid or not
infringed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, the FDA must inspect and find that manufacturing
facilities comply with cGMP before it will approve a drug
application. After the FDA approves a drug application, if any
material change in the manufacturing process, equipment or
location occurs that would necessitate additional data, then the
FDA must review and approve such change before the product may
be marketed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Even after approval by the FDA, all marketed products and their
manufacturers continue to be subject to annual reporting,
facility inspection and continued governmental review.
Subsequent discovery of previously unrecognized problems or
failure to comply with applicable regulatory requirements could
result in restrictions on manufacturing or marketing of the
product, product recall or withdrawal, fines, seizure of
product, or criminal prosecution, as well as withdrawal or
suspension of regulatory approvals. In addition, the advertising
of all marketed OTC products are subject to the Federal Trade
Commission and state consumer protection 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;&nbsp;&nbsp;&nbsp;&nbsp;
Some products intended for OTC marketing require FDA approval
through one of the three processes described above. Many OTC
drugs, however, may be commercially distributed without prior
FDA approval by following the FDA&#146;s OTC monographs. The OTC
monographs classify certain drug ingredients as safe for
specified uses and establish categorical requirements for the
marketing of drugs containing such ingredients without
pre-approval. Our existing products containing a new formulation
of sustained release guaifenesin are not OTC monograph drugs and
were approved pursuant to Section&nbsp;505(b)(2) NDAs, as
described above.
</DIV>

<P align="center" style="font-size: 10pt;">53

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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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Approval of Our Existing Guaifenesin Products.</I> The
following table sets forth when the FDA approved the 505(b)(2)
applications for our existing guaifenesin products:
</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="41%">&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="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>505(b)(2)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</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>Application or</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</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>Supplement</B></TD><TD></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 colspan="2" align="center" nowrap><B>IND Filing</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Submission</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>FDA Approval</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mucinex SE</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>June&nbsp;1998</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>June&nbsp;2000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>July 2002</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Humibid</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>June&nbsp;1998</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>August 2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>December&nbsp; 2002</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mucinex DM</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>September&nbsp; 2000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>June&nbsp;2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>April 2004</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Maximum strength guaifenesin/</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    dextromethorphan HBr</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    combination</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>September&nbsp; 2000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>June&nbsp;2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>April 2004</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mucinex D</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>September&nbsp; 2000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>January 2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>June&nbsp;2004</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Maximum strength guaifenesin/</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    pseudoephedrine HCl</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    combination</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>September&nbsp; 2000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>January 2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" nowrap>June&nbsp;2004</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;&nbsp;&nbsp;&nbsp;&nbsp;
While all of these products have been approved for marketing, we
have only launched Mucinex SE and Mucinex DM to date. We expect
to launch Mucinex&nbsp;D and Humibid in the first quarter of
2006 and the remaining maximum strength formulations in the
second 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;&nbsp;&nbsp;&nbsp;&nbsp;
In 2002, the FDA approved our 505(b)(2) application for Mucinex
SE as an OTC long-acting guaifenesin product. Prior to our
505(b)(2) application for Mucinex SE, only short-acting
guaifenesin products had been marketed OTC, while long-acting
guaifenesin products were marketed as prescription drugs despite
their lack of formal approval by the FDA. Under the Durham
Humphrey Act of 1951, the FDA established that no drug may
simultaneously be sold as a non-prescription product and as a
prescription product at the same dose for the same indication.
Any products that violate this rule are subject to FDA
regulatory action and removal from the market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On October&nbsp;11, 2002, the FDA issued 66 warning letters to
the manufacturers, distributors, marketers, and retailers of
single-ingredient guaifenesin extended-release products. The
letters stated that such prescription products require FDA
approval, and without FDA approval, they could no longer be
marketed legally. A number of the manufacturers and distributors
that received a warning letter from the FDA filed a
&#147;Citizens Petition,&#148; which is similar to an appeal,
with the FDA requesting that the agency either elect not to
enforce existing regulatory policies requiring removal of the
drugs from the market or delay such enforcement. On
February&nbsp;25, 2003, the FDA issued a letter in response to
the Citizens Petition to the 66&nbsp;recipients of the original
warning letter, reiterating that following the FDA&#146;s
approval of Mucinex&nbsp;SE in July 2002, all other
single-ingredient guaifenesin extended-release drug products may
no longer be marketed legally. The FDA decided, however, to
allow a grace period for such drugs to be removed from the
market as follows:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the warning letter recipients were required to cease
    manufacturing unapproved single-ingredient guaifenesin
    extended-release products no later than May&nbsp;21, 2003;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    no distribution (including distribution by secondary wholesalers
    or other distributors) could occur after October&nbsp;23,
    2003;&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">
    no retail sales could occur after November&nbsp;30, 2003.</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;&nbsp;&nbsp;&nbsp;&nbsp;
In October 2003, the FDA published a draft compliance policy
guide describing its intent to exercise its enforcement
discretion with regard to drugs marketed in the United States
that do not have required FDA approval for marketing once the
FDA has approved a similar drug. In publishing the draft policy
guide, the FDA publicly affirmed the actions it took relating to
long-acting, single-ingredient guaifenesin products. As of this
date, however, the FDA has only taken regulatory action to
remove from the market single-ingredient, extended-release
guaifenesin. Mucinex&nbsp;DM and our maximum strength,
long-acting guaifenesin and dextromethorphan combination
product, as well as Mucinex&nbsp;D and our maximum
</DIV>

<P align="center" style="font-size: 10pt;">54

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strength, long-acting guaifenesin and pseudoephedrine
combination product, have also received approval pursuant to
Section&nbsp;505(b)(2) NDAs. We are hopeful the FDA will take
similar action on extended-release guaifenesin in combination
products. However, there can be no assurance that the FDA will
do so or when any such action may take place.
</DIV>

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    <B><I>Effective Market Exclusivity for Long-Acting,
    Single-Ingredient Guaifenesin Products</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;&nbsp;&nbsp;&nbsp;&nbsp;
The FDA&#146;s action to remove all existing long-acting,
single-ingredient guaifenesin products from the market has
enabled Mucinex&nbsp;SE to obtain a period of effective market
exclusivity. This regulatory position results in two barriers to
entry for potential competitors. First, we believe that a third
party product that is sufficiently similar to Mucinex SE to be
eligible for approval through the ANDA process would infringe
our patent covering our extended-release delivery system for
guaifenesin. Second, we believe that the process of developing a
drug with a different pharmacokinetic profile and obtaining FDA
approval of such drug through a NDA or 505(b)(2) application
would take two to three years from the start of such process. If
the FDA removes from the market products similar to Mucinex DM,
Mucinex D and their maximum strength counterparts, third parties
seeking to introduce similar products will face the same
barriers to entry.
</DIV>

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<B>Other Regulation</B>
</DIV>

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The Prescription Drug Marketing Act, or the PDMA, imposes
requirements and limitations upon drug sampling, as well as
prohibits states from licensing distributors of prescription
drugs unless the state licensing program meets certain federal
guidelines that include minimum standards for storage, handling
and record keeping. In addition, the PDMA sets forth civil and
criminal penalties for violations. The FDA and the states are
still implementing various sections of the PDMA.
</DIV>

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Manufacturers of marketed drugs must comply with other
applicable laws and regulations required by the FDA, the Drug
Enforcement Administration, the Environmental Protection Agency,
and other regulatory agencies. Failure to do so could lead to
sanctions, which may include an injunction that would suspend
manufacturing, the seizure of drug products and the refusal to
approve additional marketing applications. Manufacturers of
controlled substances are also subject to the licensing, quota
and regulatory requirements of the Controlled Substances Act.
Failure to comply with the Controlled Substances Act and the
regulations promulgated thereunder could subject us to loss or
suspension of those licenses and to civil or criminal penalties.
</DIV>

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<B>Reimbursement</B>
</DIV>

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In the United States, sales of pharmaceutical products depend in
part on the availability of reimbursement to the patient from
third-party payors, such as government health administrative
authorities, managed care providers and private insurance plans.
Third-party payors are increasingly challenging the prices
charged for medical products and services and examining their
cost-effectiveness. Generally, such payors do not cover OTC
products.
</DIV>

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Medicaid, a state health program for certain low-income
individuals, does not generally cover the cost of OTC products.
Under Medicaid, however, 25&nbsp;state programs have and
continue to cover the cost of long-acting guaifenesin products,
including our products. Any of these states could decide not to
cover our products at any time. In addition, we are obligated to
pay rebates on sales of our products to Medicaid beneficiaries.
We estimate that sales to Medicaid beneficiaries represented
approximately 6% of retail sales of Mucinex SE during the six
months ended December&nbsp;31, 2004 and 13% for the fiscal year
ended June&nbsp;30, 2004.
</DIV>

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<B>Manufacturing</B>
</DIV>

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<I>The Cardinal Health Supply Agreement.</I> In April of 2004,
we sold our Fort&nbsp;Worth, Texas manufacturing assets to
Cardinal Health and entered into a ten-year supply agreement
with Cardinal Health. Under the supply agreement, Cardinal
Health provides us with finished goods for a share of our
profit. The profit sharing structure provides that as our gross
profit (before the profit share) increases,
</DIV>

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Cardinal Health&#146;s percentage share of the gross profit
decreases. The agreement runs on a contract year that ends
March&nbsp;31. Pursuant to the agreement, we are committed to
pay Cardinal Health a minimum profit share of $4.0&nbsp;million,
$3.0&nbsp;million and $3.0&nbsp;million during the contract
years ending in 2005, 2006 and 2007, respectively. Additionally,
Cardinal Health has the exclusive right to manufacture our
current products and a right to manufacture any new drug
products we intend to market, unless Cardinal Health does not
have the means to do so and cannot be expected to obtain such
means within a reasonable time frame.
</DIV>

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Currently, Cardinal Health only manufactures products for us at
the Fort&nbsp;Worth facility. However, we are currently
validating an additional Cardinal Health facility and other
secondary suppliers to Cardinal Health in the event of a
catastrophe at a Cardinal Health facility or other disruption to
manufacturing. Packaging is currently being done in
Fort&nbsp;Worth, at an alternate Cardinal Health site and by an
additional third party. We anticipate having validated
alternative facilities by June&nbsp;30, 2005. We continue to
evaluate alternative sites and will validate such sites as
necessary to provide a steady supply of product.
</DIV>

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<I>Raw Material Sourcing Arrangements.</I> Cardinal Health
currently uses one supplier for certain raw materials used in
its manufacturing process. Cardinal Health depends on a single
supplier for guaifenesin that has the exclusive right through
July 2006 to supply guaifenesin for Mucinex SE and 90% of the
guaifenesin Cardinal Health uses in Mucinex DM, Mucinex D and
our future products. In addition, Cardinal Health depends on one
supplier for dextromethorphan HBr. During fiscal 2004, Cardinal
Health&#146;s supplier of dextromethorphan HBr notified Cardinal
Health that they will be exiting the dextromethorphan HBr
manufacturing business. At such time, Cardinal Health obtained a
commitment from the supplier to provide Cardinal Health with a
limited supply of dextromethorphan HBr. Based upon our sales of
Mucinex DM, we believe this commitment will provide us with an
adequate supply through December 2006. We are actively pursuing
secondary suppliers of dextromethorphan HBr and guaifenesin as
well as other active and inactive ingredients.
</DIV>

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<B>Intellectual Property</B>
</DIV>

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Our success depends in part on our ability to obtain and
maintain proprietary protection for our product candidates,
technology and know-how, to operate without infringing on the
proprietary rights of others and to prevent others from
infringing on our proprietary rights. We protect our proprietary
position by, among other methods, 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 also rely on trade secrets, know-how, continuing
technological innovation, and in-licensing opportunities to
develop and maintain our proprietary position.
</DIV>

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We have been granted a U.S. patent that expires in April 2020,
which contains claims encompassing a guaifenesin product having
an immediate-release portion and an extended-release portion.
Both Mucinex SE and Humibid utilize our patented technology in a
bi-layered tablet providing both immediate and long-acting
guaifenesin to patients. The two tablet layers combine the
benefits of the fast onset of action of immediate-release
guaifenesin with the convenient dosing and reliable 12-hour
blood levels produced by the extended-release guaifenesin tablet
layer. The same bi-phasic guaifenesin release pattern also
applies to our currently-approved Mucinex products and most
likely any future combination product line extensions. None of
the extended-release prescription products for which we
performed dissolution testing met the 12-hour blood levels that
we were required to meet to obtain approval of our NDAs. The
active ingredients in our products and most of our product
candidates, including guaifenesin, dextromethorphan and
pseudoephedrine, are chemical compounds that have been in
existence for many years and, therefore, are not patentable.
</DIV>

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We currently are seeking additional U.S.&nbsp;patent protection
for each of our FDA-approved products. Corresponding patent
applications have also been filed in a number of foreign
countries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Adams, <I>A </I>Adams Respiratory Therapeutics, Humibid,
Mucinex, and Mr.&nbsp;Mucus are our registered trademarks or are
the subject of pending trademark applications. In addition, we
have registered Mucinex in Canada and Mexico.
</DIV>

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<B>Competition</B>
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We currently compete in the OTC pharmaceutical market and we
intend to compete in the prescription market. The pharmaceutical
industry in which we operate is characterized by rapidly
advancing technologies and intense competition. Our competitors
include pharmaceutical companies, biotechnology companies,
specialty pharmaceutical and generic drug companies, academic
institutions, government agencies, and research institutions.
All of these competitors currently engage in or may engage in
the future in the development, manufacture and commercialization
of new pharmaceuticals, some of which may compete with our
present or future products.
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We believe our current primary competitors in the OTC
pharmaceutical market are:
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    <TD>&#149;</TD>
    <TD align="left">
    Pfizer, Inc. (Sudafed&#174; and Benadryl&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    The Procter&nbsp;&#38; Gamble Company (Dayquil&#174; and
    Nyquil&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    McNeil Consumer and Specialty Pharmaceuticals, a division of
    McNeil-PPC, Inc., which is an operating company of
    Johnson&nbsp;&#38; Johnson (Tylenol Cold and Flu&#174; and
    Motrin Cold and Sinus&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Wyeth (Robitussin&#174;, Dimetapp&#174; and Advil Cold and
    Sinus&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Novartis Consumer Health, a division of Novartis AG
    (Theraflu&#174; and Triaminic&#174;);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Schering-Plough Corp. (Claritin&#174;, Coricidin&#174; and
    Drixoral&#174;);&nbsp;and</TD>
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    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Bayer AG (Alka Seltzer Plus Cold&#174; and Aleve Cold and
    Sinus&#174;).</TD>
</TR>

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In addition, we and our competitors face substantial competition
from private label brands, such as the CVS brand, which are
often less expensive.
</DIV>

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The key competitive factors affecting the success of Mucinex are
likely to be its consumer awareness, physician and pharmacist
acceptance and price.
</DIV>

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<B>Properties and Facilities</B>
</DIV>

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Our corporate headquarters are located at 425 Main Street in
Chester, New Jersey, and are approximately 13,500&nbsp;square
feet. We have entered into a long-term lease for this facility,
which expires in August 2014. Our current annual rent is
$339,525 plus expenses. However, our annual rent increases each
year of the lease. In addition, we lease approximately
8,500&nbsp;square feet for our development and customer service
operations in Fort&nbsp;Worth, Texas. We outsource our
manufacturing and, therefore, do not own any manufacturing
facilities.
</DIV>

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<B>Employees</B>
</DIV>

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As of February&nbsp;28, 2005, we had 161 employees. Thirty-four
of our employees work at our Chester facility and 11 work at our
Ft.&nbsp;Worth facility. One hundred thirty-three of our
employees work in sales and marketing. None of our employees are
subject to collective bargaining agreements. We consider our
relationships with our employees to be good.
</DIV>

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<B>Legal Proceedings</B>
</DIV>

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We are not currently a party to any material legal proceedings.
</DIV>

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<A name='112'></A>
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<B>MANAGEMENT AND BOARD OF DIRECTORS</B>
</DIV>

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The following table sets forth information about our executive
officers and directors, as of February&nbsp;28, 2005.
</DIV>

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    <TD align="center" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Age</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Position(s)</B></TD>
</TR>

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

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    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Michael J. Valentino</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    50</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Chief Executive Officer, President and Director</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Helmut Albrecht</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    50</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Senior Vice President, Research and Development</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David Becker</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    38</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Chief Financial Officer and Treasurer</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Robert Casale</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    46</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President, Business Development and Consumer Marketing</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Walter E. Riehemann</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    38</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President, General Counsel and Secretary</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    John S. Thievon</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    37</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President, Sales and Professional Marketing</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Susan Witham</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    45</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President, Regulatory Affairs</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    John Q. Adams,&nbsp;Sr.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    68</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">
    Steven A. Elms(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    41</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">
    Donald J. Liebentritt(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    54</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">
    Joan P. Neuscheler(1)(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    45</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">
    Harold F. Oberkfell(1)(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    58</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">
    William E. Pate(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    41</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">
    Andrew N. Schiff,&nbsp;M.D.(2)(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    39</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Director</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: 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: 9pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Member of Compensation Committee</TD>
</TR>

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

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Member of Audit Committee</TD>
</TR>

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

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Member of Nominating and Corporate Governance Committee</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>Executive Officers and 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Michael J. Valentino </I>has been our President, Chief
Executive Officer and a Director since 2003. Mr.&nbsp;Valentino
has nearly 30&nbsp;years of experience in the prescription and
consumer pharmaceuticals industry. From 2002 to 2003,
Mr.&nbsp;Valentino served as President and Chief Operating
Officer of the Global Human Pharmaceutical Division of Alpharma
Inc. Mr.&nbsp;Valentino was responsible for all of
Alpharma&#146;s pharmaceutical operations in 60 countries
worldwide. From 2000 to 2002, he served as Executive Vice
President, Global Consumer Pharmaceuticals, for Novartis
International AG. Mr Valentino was responsible for global
development of Novartis&#146;s OTC products. Mr.&nbsp;Valentino
was Chairman of the Consumer Health Products Association in 2001
and is currently a member of its board of directors.
Mr.&nbsp;Valentino has been a member of the board of directors
of Myogen, Inc. since March 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Helmut Albrecht,&nbsp;M.D.</I> joined us in 2004 and serves
as our Senior Vice President for Research and Development. Prior
to joining us, Dr.&nbsp;Albrecht was Vice President of Global
Preclinical and Clinical Development and Drug Safety at Novartis
Consumer Health from August 2003 to October 2004, and from
November 2000 to August 2003, he served as Vice President for
Research and Development for OTC (in North America). Before
joining Novartis, Dr.&nbsp;Albrecht held leadership positions in
the area of pharmaceutical medicine involving prescription and
OTC&nbsp;products as well as dietary supplements at SmithKline
Beecham Consumer Health (1996-2000), Procter&nbsp;&#38; Gamble
OTC Health Care and P&#38;G Pharmaceuticals, Altana
Pharmaceuticals (Byk Gulden Pharma Group) in Germany, and Altana
Inc. in Melville, New York. Dr.&nbsp;Albrecht earned a doctorate
of medicine, <I>magna cum laude,</I> from the University of
Heidelberg. He also holds a Master of Science degree in
management and policy, an advanced New York State certificate in
health care management from SUNY at Stony Brook and a diploma in
</DIV>

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<DIV align="left" style="font-size: 10pt;">
pharmaceutical medicine. Dr.&nbsp;Albrecht is a fellow, as well
as a previous board member, of the Faculty of Pharmaceutical
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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>David Becker </I>has been our Chief Financial Officer and
Treasurer since 2000 and was our interim Chief Operating Officer
from May 2003 to April 2004. Prior to joining us,
Mr.&nbsp;Becker was a Senior Manager in the merger and
acquisitions practice of Ernst&nbsp;&#38; Young LLP from
November 1997 to September 2000. From January 1996 to November
1997, Mr.&nbsp;Becker served as Controller for the Salt Lake
City-based start-up company RxAmerica LLC, a pharmacy benefit
management&nbsp;and mail-service pharmacy operation. From 1991
to 1995, he served as a financial auditor with Ernst&nbsp;&#38;
Young LLP. Mr.&nbsp;Becker began his professional career in 1990
as an audit and tax accountant for the southern California-based
accounting firm of Glenn M. Gelman&nbsp;&#38; Associates.
Mr.&nbsp;Becker earned a bachelor&#146;s degree in accounting in
1990 from the University of Southern Mississippi and is a
certified public accountant and certified treasury professional.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Robert Casale </I>has been our Vice President, Business
Development and Consumer Marketing since 2004. Prior to joining
us, Mr.&nbsp;Casale was affiliated with Philosophy IB, a
management consulting firm, from May 2001 to February 2004. From
September 2000 to April 2001, Mr.&nbsp;Casale served as Vice
President, Business Development and Strategic Planning, for the
Consumer Healthcare Division of Pfizer Inc. and, in that
capacity, led development of a strategic plan for the newly
merged Pfizer Inc. and Warner-Lambert Company consumer
businesses. Mr.&nbsp;Casale began his healthcare career at
Warner-Lambert Company, where he held various positions,
including Vice President of Marketing for upper respiratory and
gastrointestinal consumer products and Global Vice President for
Warner-Lambert Company&#146;s OTC&nbsp;gastrointestinal and skin
care businesses from July 1993 to August 2000. Mr.&nbsp;Casale
received a bachelor&#146;s degree in business administration and
English from Rutgers College in 1980 and a Juris Doctorate, with
honors, from Rutgers Law School in 1983.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Walter E. Riehemann </I>has served as our Vice President,
General Counsel and Secretary since 2003. Prior to joining us,
he was with the international law firm of Holland&nbsp;&#38;
Knight LLP from 2002 to 2003. From 2000 to 2002,
Mr.&nbsp;Riehemann served as President and Chief Executive
Officer of Dawson Managers, Inc., a management consulting firm
engaged in corporate restructuring and providing interim
management services to start-up and troubled companies, and from
1995 to 2000, he served in a variety of positions with RISCORP,
Inc., most recently as President and General Counsel. From 1993
to 1995, Mr.&nbsp;Riehemann was an associate with the law firm
of Powell Goldstein LLP. Mr.&nbsp;Riehemann earned a
bachelor&#146;s degree, <I>cum laude</I>, from Chadron State
College in Chadron, Nebraska, in 1987, and a Juris Doctorate,
<I>summa cum laude</I>, from The Ohio State University College
of Law in 1990.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>John S. Thievon </I>has served as our Vice President, Sales
and Professional Marketing since 2000. Prior to his current
position, Mr.&nbsp;Thievon held various positions with us from
January 1999 to May 2000, including Northeast Regional Business
Director and Director of Marketing. Prior to joining us,
Mr.&nbsp;Thievon held various positions with IMS Health
Incorporated, including Account&nbsp;Manager,
Account&nbsp;Director, and Director of Sales Training from
January 1995 to December 1998, and from 1990 to 1994, he served
as a Sales Representative with Ortho Pharmaceuticals Inc.
Mr.&nbsp;Thievon graduated from Pace University with a Bachelor
of Business Administration degree, with a concentration in
marketing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Susan Witham </I>joined us in October 2004 and serves as our
Vice President of Regulatory Affairs. Prior to joining us,
Ms.&nbsp;Witham served as the Vice President, Regulatory Affairs
for Columbia Laboratories, Inc. from April 2002 to September
2004, and from September 2000 to April 2002, Ms.&nbsp;Witham
served as Global Regulatory Head for Marketed Products and
Practices in the Oncology and Metabolism Category at Aventis
Pharmaceuticals Corporation. From 1999 through 2000,
Ms.&nbsp;Witham served as Rx Director of Regulatory Affairs for
Johnson&nbsp;&#38; Johnson Consumer Products Worldwide/ Ortho
Dermatological Drug Products. Previously, Ms.&nbsp;Witham spent
17&nbsp;years at Novartis Pharmaceuticals Corporation, formerly
Sandoz Pharmaceuticals Corporation, where she held several
senior positions, including associate director of Drug
Regulatory Affairs. Ms.&nbsp;Witham received her Bachelor of
Science degree in biology from Bridgewater College.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>John Q. Adams,&nbsp;Sr.</I> has been a director since 1997.
He is President of J.Q. Enterprises, a holding company for his
interests in real estate and ranching. Mr.&nbsp;Adams has had a
long career in the pharmaceutical industry and has owned three
companies: Baylor Laboratories, sold to Norwich Eaton
Pharmaceuticals; Allerderm, Inc., sold to Virbac Inc. in France;
and Adams Laboratories, a private pharmaceutical company focused
on respiratory therapy, sold to Medeva Pharmaceuticals, where
from 1991 to 1995, Mr.&nbsp;Adams was a director and was also
President of Medeva Americas. He later formed our company, which
repurchased certain assets from Medeva Pharmaceuticals.
Mr.&nbsp;Adams served as our Chairman and Chief Executive
Officer until May 2003. He continues to serve as our Chairman
and retains memberships and board positions in several
professional and philanthropic organizations, including the
American College of Allergy and the Vanderbilt University Voice
Center. He is also an Honorary Fellow of the American Academy of
Otolaryngology-Head and Neck Surgery. Mr.&nbsp;Adams holds a
degree in biology from Heidelberg 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Steven A. Elms </I>has been a director since 2001. He serves
as a Managing Director of Perseus-Soros Management, LLC, an
affiliate of Perseus-Soros BioPharmaceutical Fund, LP, a private
equity fund. For five years prior to joining Perseus-Soros, Mr.
Elms was a Principal in the Life Science Investment Banking
group of Hambrecht&nbsp;&#38; Quist (now J.P. Morgan). His
previous healthcare sector experience includes over two years as
a pharmaceutical sales representative and as a consultant for
The Wilkerson Group. Mr. Elms serves as director of Bioenvision,
Inc. and a number of private biotechnology companies. Mr. Elms
received a M.B.A. from Northwestern&#146;s Kellogg Graduate
School of Management and a B.A. in Human Biology from Stanford
University.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Donald J. Liebentritt </I>has been a Director since February
2005. He has been the President of Equity Group Investments,
L.L.C., or EGI, a private investment firm, since May 2000, and
had been Executive Vice President and General Counsel of EGI
since 1997. He is also an officer and director of various
private affiliates of EGI. He is the President and a member of
the Board of Managers of Chai Trust Company, an Illinois
registered trust company. Mr.&nbsp;Liebentritt has been the
Chief Executive Officer and President since December 2002, a
Director since May 2002, and was a Vice President from May 2000
until December 2002, of First Capital Financial, L.L.C., a
manager of publicly held investment funds. Mr.&nbsp;Liebentritt
has been a director of Home Products International since
December 2004, and a director of WRS Infrastructure &#38;
Environment, Inc., since December 2003. He has been a director
of Children&#146;s Oncology Services, Inc. since October 2003.
Mr.&nbsp;Liebentritt is a licensed attorney in the State of
Illinois. He received a bachelor&#146;s degree from Loyola
University of Chicago in 1972, and his law degree from the
University of Chicago in 1976.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Joan P. Neuscheler </I>has been a Director since 2002.
Ms.&nbsp;Neuscheler has 16 years of experience in private equity
investing as an officer of Tullis-Dickerson &#38; Co., Inc., a
health care-focused venture capital firm. Since July 1998,
Ms.&nbsp;Neuscheler has been the President of Tullis-Dickerson
&#38; Co., Inc. Prior to joining Tullis-Dickerson,
Ms.&nbsp;Neuscheler&#146;s previous experience includes three
years in public accounting with Arthur Andersen and five years
experience as Chief Financial Officer for Magnant Re
Intermediaries, Inc. Ms.&nbsp;Neuscheler is a Director of
Essential Group, Inc., a specialty clinical research
organization, and a number of privately held companies. She
received her B.B.A. and her M.B.A. from Pace University.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Harold F. Oberkfell </I>has been a director since April 2004.
Mr.&nbsp;Oberkfell spent 32&nbsp;years of his career as an
executive with Warner-Lambert Company, retiring in June 2000.
Mr.&nbsp;Oberkfell was Vice President and Knowledge Management
Officer of Warner-Lambert Company from August 1998 to June 2000
and President of the company&#146;s Latin America/ Asia sector
from September 1994 to August 1998. Prior to that, he held
positions at the Parke-Davis division of Warner-Lambert Company,
including President of Parke-Davis North America and Vice
President of Marketing and Sales. His past affiliations include
the National Pharmaceutical Council Board of Directors, the
Advisory Committee for Rutgers University Business School, the
University of Medicine and Dentistry of New Jersey Foundation
Board of Trustees, and the Biomedical Services Committee of the
American Red Cross Board of Governors. Mr.&nbsp;Oberkfell
currently serves on the Board of Directors of Avanir
Pharmaceuticals, Inc.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>William E. Pate </I>has been a director since 2000.
Mr.&nbsp;Pate is a Managing Director of Equity Group
Investments, L.L.C. (EGI), a privately-held investment firm.
Mr.&nbsp;Pate has been employed by EGI or its predecessor in
various capacities since 1994. Prior to his tenure at EGI, he
was an associate at the Blackstone Group and in the mergers and
acquisitions group of Credit Suisse First Boston. Mr.&nbsp;Pate
serves as the Chairman of the Board of Directors of Danielson
Holding Corporation and serves as a member of the board of
directors of certain private affiliates of EGI. He received a
Juris Doctorate degree from the University of Chicago Law School
and a Bachelors of Arts degree from Harvard 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Andrew N. Schiff, M.D. </I>has been a director since 2001.
Dr.&nbsp;Schiff joined Perseus-Soros Management, LLC, an
affiliate of Perseus-Soros Biopharmaceutical Fund, LP, a private
equity firm, in September of 1999 and currently serves as a
Managing Director. Over the last 10&nbsp;years, Dr.&nbsp;Schiff
has practiced internal medicine at The New York Presbyterian
Hospital, where he maintains his position as a Clinical
Assistant Professor of Medicine. He currently serves as a
director of Bioenvision, Inc., Myogen, Inc. and Barrier
Therapeutics, Inc. Dr.&nbsp;Schiff received his Doctorate of
Medicine from Cornell University Medical College and his M.B.A.
from Columbia University. His bachelor&#146;s degree in
neuroscience was awarded with honors by Brown University.
</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>Election of 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;&nbsp;&nbsp;&nbsp;&nbsp;
Our board of directors elects our officers on an annual basis
and our officers serve until their successors are duly elected
and qualified. There are no family relationships among any of
our officers or directors.
</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>Committees of the Board 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;&nbsp;&nbsp;&nbsp;&nbsp;
Our board currently has three committees: the audit committee,
the compensation committee, and the nominating/corporate
governance committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that our audit and compensation committees will meet
the current requirements of the Sarbanes-Oxley Act of 2002 as
they become applicable to us and that our nominating committee
will meet the current requirements of the Nasdaq National Market
rules and regulations as they become applicable to us. Under
current SEC and Nasdaq National Market rules and regulations,
within one year of effectiveness only independent directors may
serve on audit, compensation and nominating committees. Each
member of the compensation and nominating and corporate
governance committees meets the definition of independence
established by the Nasdaq National Market. Ms. Neuscheler meets
the SEC and Nasdaq definitions of independence for membership on
the audit committee. The audit committee, compensation committee
and nominating committee will adopt written charters that will
be available on our website prior to completion of the 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Audit Committee.</I> Our audit committee&#146;s
responsibilities include:
</DIV>

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<TR>
    <TD width="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    appointing a firm to serve as independent auditor to audit our
    financial statements;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    discussing the scope and results of the audit with the
    independent auditor, and reviews with management and the
    independent accountant our interim and year-end operating
    results;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    considering the adequacy of our internal accounting controls and
    audit procedures;&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">
    approving (or, as permitted, pre-approves) all audit and
    non-audit services to be performed by the independent auditor.</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;&nbsp;&nbsp;&nbsp;&nbsp;
The audit committee has the sole and direct responsibility for
appointing, evaluating and retaining our independent auditors
and for overseeing their work. All audit services and all
non-audit services, other than de minimis non-audit services, to
be provided to us by our independent auditors must be approved
in advance by our audit committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The members of our audit committee are William Pate,
Dr.&nbsp;Andrew Schiff and Joan Neuscheler. The board of
directors has determined that Ms.&nbsp;Neuscheler is an
&#147;audit committee financial expert&#148; as
</DIV>

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such term is defined in Item 401(h) of Regulation S-K.
Dr.&nbsp;Schiff will serve as chairperson of the audit committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Compensation Committee.</I> Our compensation committee&#146;s
responsibilities include:
</DIV>

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<TR>
    <TD width="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    reviewing and recommending approval of compensation of our
    executive officers;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    administering our stock incentive and employee stock purchase
    plans;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    reviewing and making recommendations to our board with respect
    to incentive compensation and equity plans;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    evaluating our Chief Executive Officer&#146;s performance in
    light of corporate objectives;&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">
    setting our Chief Executive Officer&#146;s compensation based on
    the achievement of corporate objectives.</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;&nbsp;&nbsp;&nbsp;&nbsp;
The members of our compensation committee are Steve Elms, Joan
Neuscheler and Harold Oberkfell. Ms.&nbsp;Neuscheler will serve
as the chairperson of the compensation committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Nominating and Corporate Governance Committee.</I> Our
nominating and corporate governance committee identifies,
evaluates and recommends nominees to our board of directors and
committees of our board of directors, conducts searches for
appropriate directors and evaluates the performance of our board
of directors and of individual directors. The nominating and
corporate governance committee is also responsible for reviewing
developments in corporate governance practices, evaluating the
adequacy of our corporate governance practices and reporting and
making recommendations to the board concerning corporate
governance matters.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The members of our nominating and corporate governance committee
are Donald Liebentritt, Dr. Andrew Schiff and Harold Oberkfell.
Mr.&nbsp;Oberkfell will serve as chairperson of the nominating
and corporate governance committee and as our lead independent
director.
</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>Election 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;&nbsp;&nbsp;&nbsp;&nbsp;
In accordance with the terms of our certificate of
incorporation, our board of the directors is divided into three
classes:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Class&nbsp;I, whose term will expire at the annual meeting of
    stockholders to be held in fiscal year 2006;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Class&nbsp;II, whose term will expire at the annual meeting of
    stockholders to be held in fiscal year 2007;&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">
    Class&nbsp;III, whose term will expire at the annual meeting of
    stockholders to be held in fiscal year 2008.</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Class&nbsp;I directors will be Donald Liebentritt, John
Adams, Sr. and Dr. Andrew Schiff, the Class&nbsp;II directors
will be Steve Elms, Joan Neuscheler and William Pate, and the
Class&nbsp;III directors will be Harold Oberkfell and Michael
Valentino. At each annual meeting of stockholders, or special
meeting in lieu thereof, after the initial classification of the
board of directors, the successors to directors whose terms will
then expire will be elected to serve from the time of election
and qualification until the third annual meeting following
election or special meeting held in lieu thereof. The number of
directors may be changed only by resolution of the board of
directors or a super-majority vote of the stockholders. Any
additional directorships resulting from an increase in the
number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes
in control of management.
</DIV>

<P align="center" style="font-size: 10pt;">62

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<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>Director 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;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to this offering, Harold Oberkfell and John&nbsp;Q. Adams,
Sr. were the only directors who received compensation for their
services as director. Harold Oberkfell received $3,000&nbsp;per
board meeting and was awarded a one-time grant of options to
acquire 50,000&nbsp;shares of common stock at an exercise price
of $0.78. The option vests ratably over a five year period.
Through October&nbsp;2004, John&nbsp;Q. Adams, Sr. received
$20,448 per month for his service as Chairman of the Board of
Directors. We pay the lease payment, insurance and taxes on his
automobile. In addition, all the options he held as of
April&nbsp;30, 2003 to acquire shares of our common stock under
our Long Term Incentive Plan vested.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
the compensation committee of our board of directors adopted a
compensation program for independent directors. Pursuant to this
program, each independent director will receive a
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;annual
retainer as well as
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
each board meeting attended in person
($&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
meetings attended by video or telephone conference). The
chairperson of the compensation committee and the nominating and
corporate governance committee will receive
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
each committee meeting attended in person
($&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
meetings attended by video or telephone conference), and the
chairperson of the audit committee will receive
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
each committee meeting attended in person
($&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
meetings attended by video or telephone conference).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the director compensation program adopted
on &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
independent directors will also receive equity incentives. Each
independent director who joins our board of directors
after &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;will
receive a nonstatutory stock option exercisable
for &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock with an exercise price equal to the then fair
market value per share of our common stock. This stock option
will vest in two equal annual installments
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
on the first and second anniversaries of his or her date of
election or appointment to our board of directors.
On &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
we granted each
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
the current independent directors, a fully-vested nonstatutory
stock option exercisable
for &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock with an exercise price of $&nbsp;per share. In
addition, at each annual meeting beginning
in &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
each independent director will receive a fully-vested
nonstatutory stock option exercisable
for &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock with an exercise price equal to the then fair
market value per share of our common stock. Options granted
under the director compensation program will not be exercisable
before &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
will have a term of 10&nbsp;years.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
During fiscal 2004, Steven A. Elms, Joan P. Neuscheler and
William E. Pate served on the compensation committee of the
board of directors. None of the compensation committee members
was formerly or during fiscal 2004 an officer or employed by us.
No executive officer 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.
</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>Corporate Governance</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;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to the completion of this offering, our board will adopt
procedures and policies to comply with the Sarbanes-Oxley Act of
2002 and the rules adopted by the SEC and the Nasdaq National
Market, including a code of conduct and ethics applicable to our
officers, directors and employees. Upon completion of this
offering, our code of conduct and ethics will be available on
our website.
</DIV>

<P align="center" style="font-size: 10pt;">63

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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>Executive Compensation</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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth all compensation awarded to,
earned by or paid to our chief executive officer and the four
other highest paid executive officers for the fiscal year ended
June&nbsp;30, 2004. We refer to these officers collectively as
our &#147;named executive officers&#148;.
</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>Summary Compensation Table</B>
</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="3%">&nbsp;</TD>
    <TD width="42%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&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="4%">&nbsp;</TD>
    <TD width="3%">&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="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>Long-Term</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15">&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="14" 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="14" 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="11">&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>Securities</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>Annual</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><B>Name and Principal Position</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Year</B></TD><TD></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</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Options</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>
    <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 bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Michael J. Valentino</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>335,336</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>750,000</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>3,893,818</TD>
    <TD>&nbsp;</TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Chief Executive Officer, President and Director</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mark Gainor(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,333</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Former Chief Executive Officer, President and Director</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 bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David Becker</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>194,226</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>226,000</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>175,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Chief Financial Officer</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    John Thievon</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>161,397</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>163,000</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>245,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President Sales and Professional Marketing</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 bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Walter E. Riehemann</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>170,923</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>163,000</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>350,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President, General Counsel and Secretary</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Robert Casale(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75,000</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>350,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Vice President Business Development and Consumer Marketing</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>

</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: 8pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Mr.&nbsp;Gainor served as our interim Chief Executive Officer
    and President until August 2003 and served on our board of
    directors until January 2005.</TD>
</TR>

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

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Mr.&nbsp;Casale began as our Vice President Business Development
    and Consumer Marketing in March 2004.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Option Grants in Last Fiscal Year</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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table lists each grant of stock options during
fiscal year 2004 to the named executive officers. No stock
appreciation rights have been granted to these individuals.
</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="30%">&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="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&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="4%">&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="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="14" align="center" nowrap><B>Individual Grants</B></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="14" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></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>Percent of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&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>Total Options</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&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="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Option Term(3)</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 in</B></TD><TD></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>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="center" 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>Fiscal Year(1)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Price(2)</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%</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>10%</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>
</TR>

<TR bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Michael J. Valentino</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,893,818</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>65.65</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>08/11/2013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</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 bgcolor="#EEEEEE">
    <TD colspan="25">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mark Gainor</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>&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="25">&nbsp;</TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David Becker</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>175,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.95</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1/27/2014</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 bgcolor="#EEEEEE">
    <TD colspan="25">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    John Thievon</DIV>
    </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>0.76</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10/22/2013</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="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>3.37</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1/27/2014</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 colspan="25">&nbsp;</TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Walter E. Riehemann</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>4.64</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9/22/2013</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="#EEEEEE">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.26</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1/27/2014</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 bgcolor="#EEEEEE">
    <TD colspan="25">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Robert Casale</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>350,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3/01/2014</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>

<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: 8pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    The figures representing percentages of total options granted to
    employees in the last fiscal year are based on a total of
    5,930,938&nbsp;shares underlying options granted to our
    employees during fiscal year 2004.</TD>
</TR>

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

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    The exercise price of each option granted was equal to the fair
    market value of our common stock as valued by our board of
    directors on the date of grant. The exercise price may be paid
    in cash, in shares of our common stock valued at fair market
    value on the exercise date or through a cashless exercise
    procedure involving a same-day sale of the purchased shares.</TD>
</TR>

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

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    The amounts shown in the table above as potential realizable
    value represent hypothetical gains that could be achieved for
    the respective options if exercised at the end of the option
    term. These amounts represent assumed rates of appreciation in
    the value of our common stock from the fair market value on the
    date of grant. Potential realizable values in the table above
    are calculated by:</TD>
</TR>

</TABLE>

<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: 8pt;">

<TR>
    <TD width="6%"></TD>
    <TD width="6%"></TD>
    <TD width="88%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Multiplying the number of shares of our common stock subject to
    the option by the assumed initial public offering price per
    share of $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Assuming that the aggregate stock value derived from that
    calculation compounds at the annual 5% or 10% rates shown in the
    table for the balance of the term of the option.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Subtracting from that result the total option exercise price.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 8pt; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The 5% and 10% assumed rates of appreciation are suggested by
the rules of the SEC and do not represent our estimate or
projection of the future common stock price. Actual gains, if
any, on stock option exercises will be dependent on the future
performance of our common stock.
</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>Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values</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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth the number of vested and unvested
shares covered by options as of June&nbsp;30, 2004 and the
year-end value of options as of June&nbsp;30, 2004 for the named
executive officers. No options were exercised by our named
executive officers in 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="35%">&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="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&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="6" align="center" nowrap><B>Number of Securities</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="center" nowrap><B>Value of Unexercised</B></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Underlying Unexercised</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="center" nowrap><B>In-the-Money</B></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Options at June&nbsp;30, 2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="center" nowrap><B>Options at June&nbsp;30, 2004(1)</B></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="7" align="center" nowrap style="border-top: 1pt solid #000000;">&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>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="3" align="center" nowrap><B>Exercisable</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Unexercisable</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 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="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Michael J. Valentino</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,427,863</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,465,955</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">
    Mark Gainor</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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    David Becker</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>160,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>290,000</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">
    John Thievon</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>267,000</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">
    Walter E. Riehemann</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>350,000</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">
    Robert Casale</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,503</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>332,497</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: 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: 8pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Amounts presented under the caption &#147;Value of Unexercised
    in-the-Money Options at June&nbsp;30, 2004&#148; are based on
    the assumed initial public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per share minus
    the exercise price, multiplied by the number of shares subject
    to the stock option, without taking into account any taxes that
    might be payable in connection with the transaction.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Employment Agreement with Mr.&nbsp;Valentino</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;&nbsp;&nbsp;&nbsp;&nbsp;
We employ Mr.&nbsp;Valentino as our Chief Executive Officer and
President pursuant to an employment agreement effective
August&nbsp;11, 2003. The employment agreement provides for a
five year term of employment, subject to automatic renewals for
additional one-year periods. However, either we or
Mr.&nbsp;Valentino may cause the agreement to cease to extend
automatically by giving notice to the other party within six
months prior to the expiration of the term.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the agreement, Mr.&nbsp;Valentino receives a base salary
of $31,250&nbsp;per month, annualized to $375,000, subject to
increases upon an annual review by our board of directors. The
employment agreement also provides that Mr.&nbsp;Valentino is
entitled to participate in all benefit programs, including
insurance and retirement plans, available to members of the
executive management team. The agreement further provides for:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a discretionary annual target bonus based on
    Mr.&nbsp;Valentino&#146;s performance and our business results,
    as determined by our board of directors, equal to at least 100%
    of his base salary but no more than 150% of his base salary if
    he meets specified performance objectives;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">65

<!-- 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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a transaction bonus, not to exceed $2,500,000, equal to 2.0% of
    the transaction price if we carry out a specified corporate
    transaction, including a merger or consolidation or the sale,
    transfer or other disposition of a substantial portion of our
    assets;&nbsp;and</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the grant of stock options to acquire 3,893,818&nbsp;shares of
    common stock, which he is entitled to require us to register for
    sale under the Securities Act.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Under the employment agreement, either we or Mr.&nbsp;Valentino
may terminate his employment at any time. The employment
agreement also terminates upon the death or disability of
Mr.&nbsp;Valentino. Upon termination, Mr.&nbsp;Valentino will
receive any amounts earned or due but unpaid through the date of
termination, including base salary and benefits. Additionally,
if Mr.&nbsp;Valentino voluntarily resigns, other than for good
reason or disability, he may exercise his vested stock options
for three months following the date he terminates his
employment. If the agreement terminates by reason of death or
disability, Mr.&nbsp;Valentino (or his estate, as the case may
be) will be entitled to continued exercisability of his vested
stock options for one year following his death or, upon
disability, for the remainder of their original terms. He is
also entitled to continued benefits that may apply, a prorated
target bonus and, in the event of a specified transaction
occurring within nine months of termination due to disability, a
transaction bonus.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
However, if we terminate his employment without cause or if
Mr.&nbsp;Valentino terminates his employment for good reason,
Mr.&nbsp;Valentino has the right to receive an additional
payment equal to two times the sum of his base salary plus his
target discretionary bonus, a transaction bonus if a specified
transaction occurs within nine months after termination and the
right to the continued exercisability of his vested stock
options for the remainder of their original terms.
</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>Confidentiality and Noncompetition Agreement</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;&nbsp;&nbsp;&nbsp;&nbsp;
As of August&nbsp;11, 2003, we have also entered into a
confidentiality and noncompetition agreement with
Mr.&nbsp;Valentino. Under this agreement, Mr.&nbsp;Valentino
agrees not to disclose confidential information and, for a
period of 24&nbsp;months following the termination of
Mr.&nbsp;Valentino&#146;s employment, not to compete with us or
recruit our employees.
</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>Termination and Change of Control 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;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into income security agreements with David
Becker, Helmut Albrecht, Walter Riehemann, John Thievon, Robert
Casale, and Susan Witham. If we terminate any of these
individuals without cause or if any of these individuals resigns
for good reason (as defined in the agreements) within one year
after a change in control, he or she will receive severance
benefits in an amount equal to his or her earned but unpaid
salary, any awarded but unpaid bonus from the previous fiscal
year and one year of annual base salary. In addition, the
individual and his or her dependents will continue to receive
health benefits for one year following the date of termination.
The income security agreements also provide that these
individuals agree not to disclose confidential information or
for one year after termination, compete with us or recruit our
employees.
</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>Equity Benefit Plans</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>1999 Long-Term Incentive Plan</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;&nbsp;&nbsp;&nbsp;&nbsp;
On July&nbsp;21, 1999, our board of directors adopted our 1999
Long-Term Incentive Plan, which has been approved by our
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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Purpose.</I> The plan provides incentives to employees for
the purpose of attracting able persons to become employees and
encouraging employees to continue their employment and to
contribute to our growth and success.
</DIV>

<P align="center" style="font-size: 10pt;">66

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<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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Form of Awards.</I> The incentive plan authorizes the
granting of awards to employees and consultants in the following
forms:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    options to purchase shares of our common stock, which may be
    nonstatutory stock options or incentive stock options under
    section&nbsp;422(b) of the Internal Revenue Code of 1986, as
    amended;&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">
    restricted stock, which is subject to restrictions on
    transferability and other restrictions set by 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;">
All awards must be evidenced by a written award agreement, which
will include the provisions specified by the board of directors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Authorized Shares.</I> The number of shares reserved and
available for issuance under the incentive plan is
11,500,000&nbsp;shares. In the event of a subdivision or
consolidation of stock, payment of a stock dividend,
recapitalization, or other change in outstanding common stock,
the share authorization limits described above will be adjusted
proportionately, and the board of directors may adjust awards to
preserve their benefits or potential benefits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the event that any outstanding award for any reason is
cancelled or forfeited, terminates, expires or lapses, any
shares subject to the award will again be available for issuance
under the incentive plan, subject to the board&#146;s
discretion. If a participant pays the exercise price of an
option by delivering to us previously owned shares, only the
number of shares we issue in excess of the surrendered shares
will count against the incentive plan&#146;s share limit. In
addition, if shares that would be acquired upon exercise of an
award are withheld to pay the exercise price of the award, only
the net number of shares actually issued upon exercise will
count against the incentive plan&#146;s share limit.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Administration.</I> The incentive plan is administered by the
board of directors, which has the authority to:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

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

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    determine the type and size of awards to be granted to each
    participant and the terms, conditions and restrictions of awards;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    establish, adopt or revise any rules, regulations or guidelines
    to administer the incentive plan;&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">
    take all other actions necessary or advisable to operate or
    administer the plan.</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;">
Our board of directors may also delegate its responsibility and
authority to administer the incentive plan to a committee
appointed by the board. One member of the committee, however,
will be appointed by and serve at the pleasure of S.Z.
Investments, L.L.C., an affiliate of EGI, one of our principal
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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Stock Options.</I> The board of directors will determine the
term and conditions of each stock option. In the case of
incentive stock options, to the extent that the aggregate fair
market value of our common stock with respect to which incentive
stock options may be exercisable for the first time by an
awardee during any calendar year under all of our plans exceeds
$100,000, the incentive stock options will be treated as
nonqualified stock options. Additionally, any incentive stock
option granted to a holder of 10% or more of the combined voting
power of all classes of our stock must (a)&nbsp;have an option
price of at least 110% of the fair market value of the common
stock subject to the option and (b)&nbsp;not be exercisable
after five years from the date of the grant. Only employees are
eligible to receive incentive stock options and no incentive
stock options may be granted after July&nbsp;21, 2009.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Unless otherwise provided in an award agreement, the following
termination provisions apply with respect to an option award:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    upon the death, disability or retirement of a participant, all
    of his or her outstanding options may be exercised, to the
    extent then vested, no more than one year after such termination;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">67
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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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    if a participant&#146;s employment is terminated without cause,
    all of his or her outstanding options may be exercised, to the
    extent then vested, no more than three months from the date of
    termination;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    if a participant resigns from employment, all of his or her
    outstanding options may be exercised, to the extent then vested,
    no more than 30&nbsp;days from the date of termination;&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">
    if a participant is terminated for cause, he or she forfeits all
    outstanding options and the right to exercise such options,
    regardless of their vested status.</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Restricted Stock.</I> The board of directors, in its sole
discretion, determines the restriction period applicable to any
award of restricted stock. However, such restriction period
generally lasts for five years, with the period expiring each
year for 20% of the shares awarded.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A recipient of a restricted stock award has the right to receive
dividends, to vote his or her restricted shares and to enjoy
other stockholder rights during the restriction period. However,
the participant may not sell, assign, transfer, pledge, or
otherwise dispose of the restricted stock during the restriction
period. In addition, the board of directors may prescribe
additional terms, conditions, restrictions, and limitations
applicable to an award of restricted stock at the time of such
award.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Corporate Transactions.</I> In the event of a corporate
transaction involving us, including specified mergers, reverse
mergers or the sale of all or substantially all of our assets,
each outstanding option becomes exercisable in full, all stock
restrictions are deemed satisfied and we have the right to
cancel any and all outstanding options by a cash payment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Termination.</I> Our board of directors may at any time
suspend, terminate or amend the incentive plan without
stockholder approval. However, any amendment is subject to
stockholder approval if the amendment increases the maximum
number of shares available under the incentive plan or changes
the class of participants eligible to participate in the
incentive plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon termination of the plan, the plan&#146;s terms and
provisions will continue to apply to awards granted prior to the
termination. No termination or amendment of the incentive plan
may materially adversely affect an award previously granted
under the plan without the consent of the participant holding
such award.
</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>Adams Laboratories, Inc. Retirement Savings Plan</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;&nbsp;&nbsp;&nbsp;&nbsp;
Since January&nbsp;1, 2004, we have maintained the Adams
Laboratories, Inc. Retirement Savings Plan, which is a 401(k)
tax-qualified, defined contribution plan subject to regulation
under the Employee Retirement Income Security Act of 1974, or
ERISA. Each plan year, we may make employer matching
contributions, contribute a uniform percentage of salary or make
an employer profit-sharing contribution, in our discretion.
</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>Limitation of Liability and Indemnification of Officers and
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;&nbsp;&nbsp;&nbsp;&nbsp;
Upon the closing of this offering, we will reincorporate in the
State of Delaware and adopt and file a certificate of
incorporation and bylaws. Our certificate of incorporation and
bylaws will provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law, as it
now exists or may in the future be amended, against all expenses
and liabilities reasonably incurred in connection with their
service for or on behalf of us. In addition, the certificate of
incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their
fiduciary duty as directors, unless they violated their duty of
loyalty to us or our stockholders, acted in bad faith, knowingly
or intentionally violated the law, authorized illegal dividends
or redemptions, or derived an improper personal benefit from
their action as directors. We maintain liability insurance that
insures our directors and officers against certain losses and
that insures us against our obligations to indemnify our
directors and 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;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, we have entered into indemnification agreements
with each of our directors and officers. These agreements, among
other things, require us to indemnify each director and officer
to the
</DIV>

<P align="center" style="font-size: 10pt;">68

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<DIV align="left" style="font-size: 10pt;">
fullest extent permitted by Delaware law, including
indemnification of expenses such as attorneys&#146; fees,
judgments, fines, and settlement amounts incurred by the
director or officer in any action or proceeding, including any
action or proceeding by or in right of us, arising out of the
person&#146;s services as a director or officer. At present, we
are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees,
or agents in which indemnification would be required or
permitted. We believe provisions in our certificate of
incorporation and indemnification agreements are necessary to
attract and retain qualified persons as directors and officers.
</DIV>

<P align="center" style="font-size: 10pt;">69

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<DIV align="left" style="font-size: 10pt;">
<A name='113'></A>
</DIV>

<!-- link1 "PRINCIPAL AND SELLING STOCKHOLDERS" -->

<DIV align="center" style="font-size: 10pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>PRINCIPAL AND SELLING 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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth information regarding the
beneficial ownership of our common stock, as of
February&nbsp;28, 2005, by the following individuals or groups:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Each of our directors;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Each of our named executive officers;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    All of our directors and executive officers as a group;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Each person, or group of affiliated persons, whom we know
    beneficially owns more than 5% of our outstanding common stock;
    and</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Each of our stockholders selling shares in 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;&nbsp;&nbsp;&nbsp;&nbsp;
Except as indicated by footnote, and except for community
property laws where applicable, we believe, based on information
provided to us, that the persons named in the table below have
sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. Beneficial
ownership is determined in accordance with the rules of the SEC.
The percentage of beneficial ownership before the offering is
based on 65,471,605 shares of common stock deemed outstanding as
of February&nbsp;28, 2005, after giving effect to the conversion
of our Series&nbsp;A Preferred Stock, Series&nbsp;B Preferred
Stock and Series&nbsp;C Preferred Stock into our common stock in
connection with this offering.
</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="46%">&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="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="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 style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Before Offering</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>After Offering</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="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>Number of</B></TD><TD></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>Number of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Name and Address(1)</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares(2)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Percent</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Offered</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares(2)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Percent</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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Directors and Executive Officers:</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">
    Michael J. Valentino(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,076,962</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.07</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>&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">
    David Becker(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>261,351</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>&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">
    Robert Casale(5)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75,848</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>&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">
    Walter E. Riehemann(6)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70,000</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>&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">
    John Thievon(7)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>155,530</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>&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">
    John Q. Adams, Sr.(8)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,999,790</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.05</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">
    Steven A. Elms(9)</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>&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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mark Gainor(10)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,262,391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.92</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">
    Donald J. Liebentritt(11)</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>&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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Joan P. Neuscheler(12)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,512,669</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.90</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">
    Harold F. Oberkfell(13)</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>*</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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    William E. Pate(14)</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>&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">
    Andrew N. Schiff, M.D.(15)</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>&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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    All Directors and Executive Officers as a group (15 persons)(16)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,424,541</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20.79</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">
    <B>5% Stockholders:</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 valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    EGI(17)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,482,985</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>34.08</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">
    Tullis-Dickerson&nbsp;&#38; Co., Inc.(18)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,512,669</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.90</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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Perseus-Soros BioPharmaceutical Fund, LP(19)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,080,826</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26.93</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">
    Talon Opportunity Fund, L.P.(20)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,162,799</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.34</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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Marquette Venture Partners(21)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,124,137</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.29</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">
    John Adams, Jr.(22)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,557,656</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.40</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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Selling Stockholders:</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>

</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: 8pt;">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>*</TD>
    <TD align="left">
    Less than 1%.</TD>
</TR>

</TABLE>

<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: 8pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Unless otherwise specified, the address of each beneficial owner
    listed in the table below is c/o&nbsp;Adams Laboratories, Inc.
    425&nbsp;Main Street, Chester, New Jersey 07920.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">70

<!-- 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: 8pt;">

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

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Beneficial ownership is determined in accordance with
    Rule&nbsp;13d-3 of the Exchange Act and generally includes
    voting and investment power with respect to securities, subject
    to community property laws, where applicable.</TD>
</TR>

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

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Includes 2,076,962&nbsp;shares subject to stock options
    currently exercisable or exercisable within 60&nbsp;days of
    February&nbsp;28, 2005.</TD>
</TR>

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

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    Includes: (i)&nbsp;250,000 shares subject to stock options
    currently exercisable or exercisable within 60&nbsp;days of
    February&nbsp;28, 2005 and (ii)&nbsp;2,088 currently exercisable
    warrants to purchase common stock.</TD>
</TR>

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

<TR valign="top">
    <TD>(5)&nbsp;</TD>
    <TD align="left">
    Includes 75,848&nbsp;shares subject to stock options currently
    exercisable or exercisable within 60&nbsp;days of
    February&nbsp;28, 2005.</TD>
</TR>

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

<TR valign="top">
    <TD>(6)&nbsp;</TD>
    <TD align="left">
    Includes 70,000 shares subject to stock options currently
    exercisable or exercisable within 60&nbsp;days of
    February&nbsp;28, 2005.</TD>
</TR>

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

<TR valign="top">
    <TD>(7)&nbsp;</TD>
    <TD align="left">
    Includes (i)&nbsp;153,000 shares subject to stock options
    currently exercisable or exercisable within 60&nbsp;days of
    February&nbsp;28, 2005 and (ii)&nbsp;456 currently exercisable
    warrants to purchase common stock.</TD>
</TR>

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

<TR valign="top">
    <TD>(8)&nbsp;</TD>
    <TD align="left">
    Includes (i)&nbsp;656,250 shares subject to stock options
    currently exercisable or exercisable within 60&nbsp;days of
    February&nbsp;28, 2005 and (ii)&nbsp;363,763 shares of common
    stock that are held by A&#38;B Investment Partnership, of which
    Mr.&nbsp;Adams, Sr. is a partner and controls 50% of such entity.</TD>
</TR>

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

<TR valign="top">
    <TD>(9)&nbsp;</TD>
    <TD align="left">
    Steven A. Elms is a managing director of Perseus-Soros
    Management, LLC, an affiliate of Perseus-Soros BioPharmaceutical
    Fund, LP, or PSBF. Mr.&nbsp;Elms does not have voting or
    dispositive power with respect to any of the shares owned by
    PSBF.</TD>
</TR>

</TABLE>

<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: 8pt;">

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

<TR valign="top">
    <TD>(10)&nbsp;</TD>
    <TD align="left">
    Includes 289,425 currently exercisable warrants to purchase
    common stock held by MJG Partners, L.P. (MJG Partners), a
    partnership controlled by Mr.&nbsp;Gainor. MJG Partners directly
    owns the listed shares. Mr.&nbsp;Gainor previously served as our
    Chief Executive Officer and President and was a member of our
    board of directors.</TD>
</TR>

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

<TR valign="top">
    <TD>(11)&nbsp;</TD>
    <TD align="left">
    Donald J. Liebentritt is President of Equity Group Investments,
    L.L.C. or EGI. Mr. Liebentritt does not have voting or
    dispositive power with respect to any of the shares owned by EGI.</TD>
</TR>

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

<TR valign="top">
    <TD>(12)&nbsp;</TD>
    <TD align="left">
    Includes: (i)&nbsp;1,897,371 shares of common stock and 125,000
    currently exercisable warrants to purchase common stock held by
    TD Origen Capital Fund,&nbsp;L.P.; (ii)&nbsp;1,202,718 shares of
    common stock and 31,250 currently exercisable warrants to
    purchase common stock held by TD Lighthouse Capital
    Fund,&nbsp;L.P.; and (iii)&nbsp;3,100,080 shares of common stock
    and 156,250 currently exercisable warrants to purchase common
    stock held by Tullis-Dickerson Capital Focus&nbsp;III,&nbsp;L.P.
    TD&nbsp;Origen Capital Fund,&nbsp;L.P., TD&nbsp;Lighthouse
    Capital Fund,&nbsp;L.P. and Tullis-Dickerson Capital Focus
    III,&nbsp;L.P. are each under the common management of
    Tullis-Dickerson&nbsp;&#38;&nbsp;Co.,&nbsp;Inc. of which
    Ms.&nbsp;Neuscheler is the President. Ms.&nbsp;Neuscheler
    disclaims beneficial ownership of the listed shares, except to
    the extent of her proportionate pecuniary interest therein.</TD>
</TR>

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

<TR valign="top">
    <TD>(13)&nbsp;</TD>
    <TD align="left">
    Includes 10,000 shares subject to stock options currently
    exercisable or exercisable within 60&nbsp;days of
    February&nbsp;28, 2005.</TD>
</TR>

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

<TR valign="top">
    <TD>(14)&nbsp;</TD>
    <TD align="left">
    William E. Pate is a managing director of EGI. Mr.&nbsp;Pate
    does not have voting or dispositive power with respect to any of
    the shares owned by EGI.</TD>
</TR>

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

<TR valign="top">
    <TD>(15)&nbsp;</TD>
    <TD align="left">
    Dr.&nbsp;Andrew Schiff is a managing director of Pereus-Soros
    Management, LLC, an affiliate of PSBF. Dr.&nbsp;Schiff does not
    have voting or dispositive power with respect to any of the
    shares owned by PSBF.</TD>
</TR>

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

<TR valign="top">
    <TD>(16)&nbsp;</TD>
    <TD align="left">
    Includes an aggregate of: (i)&nbsp;3,292,060 shares subject to
    options that are exercisable within 60&nbsp;days of
    February&nbsp;28, 2005; and (ii)&nbsp;820,820 currently
    exercisable warrants to purchase common stock.</TD>
</TR>

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

<TR valign="top">
    <TD>(17)&nbsp;</TD>
    <TD align="left">
    Includes: (i)&nbsp;5,982,758 shares of common stock held by
    EGI-Fund (99), L.L.C.; 4,189,655 shares of common stock held by
    EGI-Fund (00)&nbsp;Investors, L.L.C.; 1,016,969 shares of common
    stock and 216,351 currently exercisable warrants to purchase
    common stock held by EGI-Fund (01)&nbsp;Investors, L.L.C.; and
    9,814,861 shares of common stock held by EGI-Fund (02-04); and
    (ii)&nbsp;972,966 shares of common stock and 289,425 currently
    exercisable warrants to purchase common stock owned directly by
    MJG Partners with respect to which EGI-Fund (99)&nbsp;Investors,
    L.L.C. may contractually direct the exercise of voting power but
    as to which such entity disclaims beneficial ownership. The
    address of EGI is 2&nbsp;N. Riverside Plaza, 6th Floor, Chicago,
    Illinois 60606.</TD>
</TR>

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

<TR valign="top">
    <TD>(18)&nbsp;</TD>
    <TD align="left">
    Includes: (i)&nbsp;1,897,371 shares of common stock and 125,000
    currently exercisable warrants to purchase common stock held by
    TD Origen Capital Fund, L.P.; (ii)&nbsp;1,202,718 shares of
    common stock and 31,250 currently exercisable warrants to
    purchase common stock held by TD Lighthouse Capital Fund, L.P.;
    and (iii)&nbsp;3,100,080 shares of common stock and 156,250
    currently exercisable warrants to purchase common stock held by
    Tullis-Dickerson Capital Focus III, L.P. TD Origen Capital Fund,
    L.P., TD Lighthouse Capital Fund, L.P. and Tullis-Dickerson
    Capital Focus III, L.P. are each managed by Tullis-Dickerson
    &#38; Co., Inc. The address of Tullis-Dickerson&nbsp;&#38; Co.,
    Inc. is 2&nbsp;Greenwich Plaza, 4th Floor, Greenwich,
    Connecticut 06830.</TD>
</TR>

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

<TR valign="top">
    <TD>(19)&nbsp;</TD>
    <TD align="left">
    Includes 5,375,996 currently exercisable warrants to purchase
    common stock. Perseus-Soros Partners, LLC is the general partner
    of the Perseus-Soros BioPharmaceutical Fund, LP. Perseus BioTech
    Fund&nbsp;Partners, LLC and SFM Participation, L.P. are the
    managing members of Perseus-Soros Partners, LLC. Perseuspur, LLC
    is the managing member of Perseus BioTech Fund&nbsp;Partners,
    LLC. Frank Pearl is the sole member of Perseuspur, LLC and in
    such capacity may be deemed a beneficial owner of securities
    held for the account of the Perseus-Soros BioPharmaceutical
    Fund, LP. SFM AH, LLC is the general partner of SFM
    Participation, L.P. The sole managing member of SFM AH, LLC is
    Soros Fund&nbsp;Management LLC. George Soros is the Chairman of
    Soros Fund&nbsp;Management LLC and in such capacity may be
    deemed a beneficial owner of securities</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">71

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<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></TD>
    <TD align="left">
    <FONT style="font-size: 8pt">held for the account of the
    Perseus-Soros BioPharmaceutical Fund, LP. The address of
    Perseus-Soros BioPharmaceutical Fund, LP is 888 Seventh Avenue,
    29th Floor, New York, New York 10106.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT style="font-size: 8pt">(20)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT style="font-size: 8pt">Includes: (i)&nbsp;1,090,126 shares
    of common stock held by Talon Adams, LLC; and
    (ii)&nbsp;2,925,441 shares of common stock and 147,232 currently
    exercisable warrants to purchase common stock held by Talon
    Opportunity Fund, L.P. Talon Adams, LLC and Talon Opportunity
    Fund, L.P., are investment partnerships managed by Talon
    Partnership Management, LLC, an entity affiliated with Talon
    Asset Management, Inc. The address of Talon Opportunity Fund,
    L.P. is One North Franklin, Suite&nbsp;900, Chicago, Illinois
    60606.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT style="font-size: 8pt">(21)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT style="font-size: 8pt">Includes: (i)&nbsp;2,672,759 shares
    of common stock and 50,908 currently exercisable warrants to
    purchase common stock held by Marquette Venture Partners III,
    L.P.; and 1,400,470 shares of common stock held by Marquette
    Venture Partners Support Fund, L.P. Marquette Venture Partners
    III, L.P. and Marquette Venture Partners Support Fund, L.P. are
    wholly-owned subsidiaries of Marquette Venture Partners. The
    address of Marquette Venture Partners is 676&nbsp;N. Michigan
    Avenue, Chicago, Illinois 60611.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT style="font-size: 8pt">(22)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT style="font-size: 8pt">Includes: (i)&nbsp;380,938 shares
    subject to stock options currently exercisable or exercisable
    within 60&nbsp;days of February&nbsp;28, 2005; (ii)&nbsp;36,893
    shares of common stock held in trust for John Q. Adams, III of
    which Mr.&nbsp;Adams, Jr. is a co-trustee;
    (iii)&nbsp;36,893&nbsp;shares of common stock held in trust for
    Jessica Nicole Adams of which Mr.&nbsp;Adams, Jr. is a
    co-trustee; (iv)&nbsp;30,000 shares of common stock held in
    trust for Amanda J. Milner of which Mr.&nbsp;Adams, Jr. is a
    co-trustee; and (v)&nbsp;73,793 shares of common stock held in
    trust for John Q. Adams, Jr. John Adams, Jr. is the son of John
    Adams, Sr. and served as our President until June 2003. The
    address of John Q. Adams,&nbsp;Jr. is 2350 Airport Freeway,
    Suite&nbsp;222, Bedford, Texas 76022.
    </FONT></TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">72
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<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='114'></A>
</DIV>

<!-- link1 "CERTAIN RELATIONSHIPS AND RELATED PARTY 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 PARTY TRANSACTIONS</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>Private Placements of Securities to Related Parties</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;&nbsp;&nbsp;&nbsp;&nbsp;
On July&nbsp;9, 2001, we issued an aggregate of 16,129,197
shares of Series&nbsp;B Preferred Stock at a price of $1.60 per
share and warrants to purchase an aggregate of 2,655,734 shares
of Series&nbsp;B Preferred Stock at an exercise price of $1.60.
All shares of our Series&nbsp;B Preferred Stock will
automatically convert into an aggregate of 16,129,197 shares of
common stock and the warrants to purchase Series&nbsp;B
Preferred Stock will automatically become warrants to purchase
2,655,734 shares of common stock upon the closing of 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;&nbsp;&nbsp;&nbsp;&nbsp;
Between November 2002 and August 2003, we issued an aggregate of
$21,134,998 in 8% Convertible Notes and Bridge Notes together
with warrants to purchase an aggregate of 14,153,125&nbsp;shares
of common stock at an exercise price of $0.01 per share. These
notes converted into shares of Series&nbsp;C Preferred Stock.
All shares of our Series&nbsp;C Preferred Stock will
automatically convert into an aggregate of 13,814,937 shares 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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes the participation by our five
percent stockholders in these private placements.
</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="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="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="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&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="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Warrants</B></TD><TD></TD>
</TR>

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

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Consideration</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Warrants for</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Series&nbsp;C</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Common</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B>Purchaser(1)</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Paid</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Series&nbsp;B Stock</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Series&nbsp;B Stock</B></TD><TD></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>Stock</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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    EGI(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,518,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>865,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>216,351</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,836,034</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,978,827</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Perseus-Soros Biopharmaceutical Fund, LP</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,472,114</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,375,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>937,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,329,830</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,438,496</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tullis-Dickerson(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,949,104</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,125,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>312,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,520,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,554,193</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Talon Opportunity(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,011,866</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>851,430</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>147,232</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>878,086</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>906,740</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Marquette Venture Partners(5)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,488,549</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>203,632</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50,908</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>671,245</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>729,225</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: 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: 9pt;">

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

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    See &#147;Principal and Selling Stockholders&#148; for more
    information on shares held by certain of these purchasers.</TD>
</TR>

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

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Includes EGI-Fund (01)&nbsp;Investors, L.L.C., and EGI-Fund
    (02-04) Investors, L.L.C.</TD>
</TR>

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

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Includes Tullis-Dickerson Capital Focus III, L.P., TD Origen
    Capital Fund, L.P. and TD Lighthouse Capital Fund, L.P.</TD>
</TR>

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

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    Includes Talon Opportunity Fund, L.P. and Talon Adams, LLC</TD>
</TR>

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

<TR valign="top">
    <TD>(5)&nbsp;</TD>
    <TD align="left">
    Includes Marquette Venture Partners III, L.P. and MVP&nbsp;III
    Support Fund, L.P.</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;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with these private placements, we entered into
agreements with our investors providing for registration rights
with respect to the shares sold in these transactions. See
&#147;Description of Capital Stock&nbsp;&#150; Registration
Rights of Stockholders.&#148; In addition, in connection with
the above transactions, we also entered into stockholders
agreements with all of the investors participating therein
providing for, among other things, restrictions on transfer,
rights of first refusal, co-sale rights, and rights to elect
directors. These stockholders agreements and the rights
described above shall terminate upon closing of this offering.
</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>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;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into an employment agreement with
Mr.&nbsp;Valentino. See &#147;Management and Board of
Directors&nbsp;&#150; Employment Agreement with
Mr.&nbsp;Valentino.&#148;
</DIV>

<P align="center" style="font-size: 10pt;">73

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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>Income Security 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;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into income security agreements with each of
David P. Becker, Helmut H. Albrecht, Robert Casale, Walter E.
Riehemann, John Thievon, and Susan Witham. See &#147;Management
and Board of Directors&nbsp;&#150; Termination and Change of
Control Agreements.&#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>Separation Agreement</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;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into a separation and independent advisor
agreement with John Q. Adams, Sr., a director and the founder of
our company. Mr.&nbsp;Adams resigned his position as Chief
Executive Officer as of April&nbsp;30, 2003. We retained him as
a consultant through October 2004 and paid him $20,448 per
month. We pay the lease payment, insurance and taxes on his
automobile. In addition, all the options he held as of
April&nbsp;30, 2003 to acquire shares of our common stock under
our Long Term Incentive Plan vested.
</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 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;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into indemnification agreements with each of our
directors and officers. See &#147;Management and Board of
Directors&nbsp;&#150; Limitation of Liability and
Indemnification of Officers and Directors.&#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>Stock 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;&nbsp;&nbsp;&nbsp;&nbsp;
We have granted options to purchase shares of our common stock
to our executive officers and directors. See &#147;Management
and Board of Directors&nbsp;&#150; Director Compensation,&#148;
&#147;Management and Board of Directors&nbsp;&#150; Executive
Compensation&#148; and &#147;Management and Board of
Directors&nbsp;&#150; Option Grants in Last Fiscal Year.&#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>Director 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;&nbsp;&nbsp;&nbsp;&nbsp;
Please see &#147;Management and Board of Directors&nbsp;&#150;
Director Compensation&#148; for a discussion of payments made
and options granted to our directors.
</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>Participation in Reserved 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;&nbsp;&nbsp;&nbsp;&nbsp;
We expect
that &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;will
purchase &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
in the reserved share program. Please see
&#147;Underwriting&nbsp;&#150; Reserved Shares&#148; for more
information regarding the reserved share program.
</DIV>

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<DIV align="left" style="font-size: 10pt;">
<A name='115'></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;&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;shares
of common stock,
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;par
value,
and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of preferred stock,
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;par
value. The following description summarizes important terms of
our capital stock. Because it is only a summary, it does not
contain all the information that may be important to you. For a
complete description, you should refer to our certificate of
incorporation and bylaws, copies of which have been filed as
exhibits to the registration statement of which this prospectus
is a part, as well as the relevant portions of the Delaware
General Corporation Law.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>General. </I>As of February&nbsp;28, 2005, there were
65,471,605 shares of common stock outstanding and 204
stockholders of record, which assumes conversion of our
Series&nbsp;A Preferred Stock, Series&nbsp;B Preferred Stock and
Series&nbsp;C Preferred Stock into our common stock. After 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,
or &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
outstanding if the underwriters exercise their over-allotment
option in full.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Voting Rights. </I>The holders of our common stock are
entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, including the
election of directors, and they do not have cumulative voting
rights. Accordingly, the holders of a majority of the shares of
common stock entitled to vote in any election of directors can
elect all of the directors standing for election, if they so
choose.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Dividends. </I>Subject to preferences that may be applicable
to any then outstanding preferred stock, holders of our common
stock are entitled to receive ratably those dividends, if any,
as may be declared by the board of directors out of legally
available funds.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Liquidation, Dissolution and Winding Up. </I>Upon our
liquidation, dissolution or winding up, the holders of our
common stock will be entitled to share ratably in the net assets
legally available for distribution to stockholders after the
payment of all of our debts and other liabilities, subject to
the prior rights of any preferred stock then outstanding.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Preemptive Rights. </I>Holders of our common stock have no
preemptive or conversion rights or other subscription rights and
there are no redemption or sinking fund provisions applicable to
our 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Assessment. </I>All outstanding shares of our common stock
are, and the shares of our common stock to be outstanding upon
completion of this offering will be, fully paid and
nonassessable.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
Upon the closing of this offering, a total
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of undesignated preferred stock will be authorized, none of
which will be outstanding. The board of directors will have the
authority, without further action by the stockholders, to issue
from time to time the undesignated preferred stock in one or
more series and to fix the number of shares, designations,
preferences, powers, and relative, participating, optional, or
other special rights and the qualifications or restrictions
thereof. The preferences, powers, rights, and restrictions of
different series of preferred stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund
provisions, purchase funds, and other matters. The issuance of
preferred stock could decrease the amount of earnings and assets
available for distribution to holders of our common stock or
adversely affect the rights and powers, including voting rights,
of the holders of our common stock and may have the effect of
delaying, deferring or preventing a change in control of our
company.
</DIV>

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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>Warrants</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;&nbsp;&nbsp;&nbsp;&nbsp;
Upon completion of this offering, we will have outstanding
warrants to purchase 9,561,971 shares of our common stock at a
weighted average exercise price of $0.61 per share. The warrants
provide for adjustment in the event of specified mergers,
reorganizations, reclassifications, stock dividends, stock
splits, or other changes in our corporate structure.
</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>Options</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;&nbsp;&nbsp;&nbsp;&nbsp;
As of February&nbsp;28, 2005, options to purchase 10,223,480
shares of common stock at a weighted average exercise price of
$0.69 per share 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>Anti-Takeover Effects of Provisions of our Certificate of
Incorporation and Bylaws and Delaware 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;&nbsp;&nbsp;&nbsp;&nbsp;
Some provisions of Delaware law and our certificate of
incorporation and bylaws contain provisions that could make the
following transactions more difficult: (1)&nbsp;acquisition of
us by means of a tender offer; (2)&nbsp;acquisition of us by
means of a proxy contest or otherwise; or (3)&nbsp;removal of
our incumbent officers and directors. These provisions,
summarized below, are intended to encourage persons seeking to
acquire control of us to first negotiate with our board of
directors. These provisions also serve to discourage hostile
takeover practices and inadequate takeover bids.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Undesignated Preferred Stock. </I>Our board of directors has
the ability to authorize undesignated preferred stock, which
allows the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the
success of any unsolicited attempt to change control of our
company. This ability may have the effect of deferring hostile
takeovers or delaying changes in control or management of our
company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Stockholder Meetings. </I>Our bylaws provide that a special
meeting of stockholders may be called only by our President, our
Chief Executive Officer or by a resolution adopted by a majority
of our board of directors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Requirements for Advance Notification of Stockholder
Nominations and Proposals. </I>Our bylaws establish advance
notice procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of our board of
directors or a committee 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Elimination of Stockholder Action by Written Consent. </I>Our
certificate of incorporation eliminates the right of
stockholders to act by written consent without a meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Election and Removal of Directors. </I>Our board of directors
is divided into three classes. The directors in each class will
serve for a three-year term, with one class being elected each
year by our stockholders. Once elected, directors may be removed
only for cause and only by the affirmative vote of at least
66.67% of our outstanding common stock. For more information on
the classified board, see the section entitled &#147;Management
and Board of Directors&nbsp;&#150; Election of Directors.&#148;
This system of electing and removing directors may discourage a
third party from making a tender offer or otherwise attempting
to obtain control of us because it generally makes it more
difficult for stockholders to replace a majority of the
directors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Delaware Anti-Takeover Statute. </I>We are subject to
Section&nbsp;203 of the Delaware General Corporation Law, which
prohibits persons deemed &#147;interested stockholders&#148;
from engaging in a &#147;business combination&#148; with a
Delaware corporation for three years following the date these
persons become interested stockholders. Generally, an
&#147;interested stockholder&#148; is a person who, together
with affiliates and associates, owns, or within three years
prior to the determination of interested stockholder status did
own, 15% or more of a corporation&#146;s voting stock.
Generally, a &#147;business combination&#148; includes a merger,
asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. The existence
of this provision may have an anti-takeover effect with respect
to transactions not approved in advance by the board of
directors.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Special Vote Required for Certain Business Combinations.
</I>Our certificate of incorporation provides that business
combinations by &#147;interested stockholders&#148; generally
require the approval by either the holders of at least 66.67% of
our then outstanding common stock or the majority of our
&#147;continuing directors.&#148; An &#147;interested
stockholder&#148; in this provision is defined as a person who,
together with affiliates and associates, owns, or within two
years prior to the determination of interested stockholder
status did own, 15% or more of our common stock. A
&#147;continuing director&#148; is a director who is not
affiliated with the interested stockholder seeking to complete
the business combination and who was a director before such
stockholder became an interested stockholder. Like the Delaware
anti-takeover statute, this provision in our certificate of
incorporation may have the effect of limiting certain
transactions that would otherwise be in the best interests of
our 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;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Amendment of Certain Provisions in Our Organizational
Documents. </I>The amendment of any of the above provisions,
except for the undesignated preferred stock provision, would
require approval by holders of at least 66.67% of our then
outstanding 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;&nbsp;&nbsp;&nbsp;&nbsp;
The provisions of Delaware law and our certificate of
incorporation and bylaws could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence,
they may also inhibit temporary fluctuations in the market price
of our common stock that often result from actual or rumored
hostile takeover attempts. Such provisions may also have the
effect of preventing changes in our management. It is possible
that these provisions could make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their
best interests.
</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>Limitations of Liability and Indemnification 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;&nbsp;&nbsp;&nbsp;&nbsp;
We have adopted provisions in our certificate of incorporation
that limit the liability of our directors for monetary damages
for breach of their fiduciary duties, except for liability that
cannot be eliminated under the Delaware General Corporation Law.
Delaware law provides that directors of a corporation will not
be personally liable for monetary damages for breach of their
fiduciary duties as directors, except liability for any of the
following: any breach of their duty of loyalty to the
corporation or the stockholders; acts or omissions not in good
faith or that involve intentional misconduct or a knowing
violation of law; unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section&nbsp;174
of the Delaware General Corporation Law; or any transaction from
which the director derived an improper personal benefit. This
limitation of liability does not apply to liabilities arising
under the federal securities laws and does not affect the
availability of equitable remedies such as injunctive relief or
rescission.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our bylaws also provide that we will indemnify our directors and
executive officers and we may indemnify our other officers and
employees and other agents to the fullest extent permitted by
law. We believe that indemnification under our bylaws covers at
least negligence and gross negligence on the part of indemnified
parties. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee, or other agent for any
liability arising out of his or her actions in such capacity,
regardless of whether our bylaws would permit indemnification.
We have entered into separate indemnification agreements with
our directors and executive officers, in addition to the
indemnification provided for in our charter documents. These
agreements, among other things, provide for indemnification of
our directors and executive officers for expenses, judgments,
fines, and settlement amounts incurred by any such person in any
action or proceeding arising out of such person&#146;s services
as a director or executive officer or at our request.
</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 of 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;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into two registration rights agreements in
connection with our private placements. Our stockholders who
purchased Series&nbsp;A and Series&nbsp;B Preferred Stock are
entitled to certain registration rights with respect to the
shares of common stock issuable upon conversion of shares of
Series&nbsp;A and Series&nbsp;B Preferred Stock pursuant to an
agreement dated July&nbsp;9, 2001. We entered into a second
registration rights agreement with EGI-Fund (02-04) Investors,
L.L.C., Perseus-Soros
</DIV>

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<DIV align="left" style="font-size: 10pt;">
Biopharmaceutical Fund, LP, Tullis-Dickerson Capital Focus III,
L.P., TD Origen Capital Fund, L.P., and TD Lighthouse Capital
Fund, L.P. in connection with their purchase of promissory notes
convertible into Series&nbsp;C Preferred Stock on May&nbsp;19,
2003. Following completion of this offering, and subject to
limitations specified in the agreements, the registration rights
under these agreements 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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    Our stockholders who purchased shares of Series&nbsp;A and
    Series&nbsp;B Preferred Stock have the ability to require us to
    register the common stock issuable upon conversion of such
    securities and the other shares of common stock held by EGI,
    PSBF, Marquette, Tullis-Dickerson and Merrill Lynch. After
    giving effect to this offering, approximately 57% of our
    outstanding shares will be subject to registration rights
    pursuant to this agreement upon completion of this offering. EGI
    and PSBF each are entitled to request up to two long-form
    registration statements, and Marquette, Tullis-Dickerson,
    Merrill Lynch, and Talon each are entitled to request one
    long-form registration statement. In addition, the holders of
    not less than 1,081,031 shares of Series&nbsp;A Preferred Stock
    issued pursuant to a purchase agreement for Series&nbsp;A
    Preferred Stock on November&nbsp;30, 2000, other than Talon, are
    entitled to one long-form registration. Holders of at least 25%
    of the shares of common stock issued upon conversion of
    Series&nbsp;A Preferred Stock and Series&nbsp;B Preferred Stock,
    with certain exceptions, are also entitled to request a
    short-form registration statement for an offering to be made on
    a continuous basis pursuant to Rule&nbsp;415 of the Securities
    Act. Such stockholders&#146; right to demand registration is
    subject to the right of the board of directors to postpone it
    for up to 60&nbsp;days in certain circumstances. Upon
    conversion, holders of approximately 37,395,959 shares of our
    common stock will have the right to require registration of
    these shares.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    In addition, under our second registration rights agreement,
    Tullis-Dickerson Capital Focus III, L.P., TD Origen Capital
    Fund, L.P., TD Lighthouse Capital Fund, L.P., EGI-Fund (02-04)
    Investors, LLC, and Perseus-Soros Biopharmaceutical Fund, LP may
    require that we register all or part of the common stock
    issuable upon conversion of shares of any of the Series&nbsp;C
    Preferred Stock and other shares of common stock held by these
    stockholders for sale under the Securities Act. EGI and PSBF
    each are entitled to request up to two long-form registration
    statements and Tullis-Dickerson is entitled to request one
    long-form registration statement. In addition, as soon as
    practicable following the 180th day after completion of this
    offering, we must file a short-form registration statement for
    an offering to be made on a continuous basis pursuant to
    Rule&nbsp;415 of the Securities Act of all of the common stock
    issued upon conversion of shares of any of the Series&nbsp;C
    Preferred Stock and other shares of common stock held by these
    stockholders. Such stockholders&#146; right to demand
    registration is subject to the right of the board of directors
    to postpone it for up to 60&nbsp;days in certain circumstances
    and to limit the number of number of shares to be registered.
    Holders of approximately 27,968,061 shares of our common stock
    will have the right to require registration of these shares.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    If we propose to register any of our securities, other than
    pursuant to a demand registration or a registration on
    Form&nbsp;S-4 or S-8, we must include in such registration
    certain additional shares. The right of certain stockholders to
    include shares in a piggyback registration is subject to the
    right of the underwriters to limit the number of shares included
    in the 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;&nbsp;&nbsp;&nbsp;&nbsp;
We will pay all fees, costs and expenses of such registrations,
subject to certain exceptions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On May&nbsp;26, 1999, January&nbsp;18, 2000 and October&nbsp;31,
2000, we issued a total of nine warrants that included
registration rights to purchase an aggregate of
759,740&nbsp;shares of common stock. If we propose to register
any of our securities, other than pursuant to this offering or a
registration on Form&nbsp;S-4 or S-8, we must give notice to
these warrant holders and include in such registration all the
securities with respect to which we have received written
requests for inclusion. The right of these warrant holders to
include shares
</DIV>

<P align="center" style="font-size: 10pt;">78
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<DIV align="left" style="font-size: 10pt;">
in such a registration is subject to the right of the
underwriters to limit the number of shares included in the
offering. We will pay all fees, costs and expenses of such
registrations, subject to certain exceptions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Following the completion of this offering, Mr.&nbsp;Valentino is
also entitled to certain registration rights pursuant to his
employment agreement with us dated August&nbsp;11, 2003.
Mr.&nbsp;Valentino has the ability to request that we register
the common stock issuable upon the exercise of stock options
granted to him pursuant to his employment agreement. As of
December&nbsp;31, 2004, Mr.&nbsp;Valentino had been granted
options to purchase 3,893,818&nbsp;shares of common stock
pursuant to this employment agreement.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
The transfer agent and registrar for our common stock is
Wachovia Bank, N.A.
</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</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;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to apply to have our common stock quoted on the Nasdaq
National Market under the symbol &#147;ARxT&#148;.
</DIV>

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<DIV align="left" style="font-size: 10pt;">
<A name='116'></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: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to this offering, there has been no market for our common
stock, and we cannot assure you that a liquid trading market for
our common stock will develop or be sustained after this
offering. Future sales of substantial amounts of common stock,
including shares issued upon exercise of options and warrants,
in the public market after this offering, or the anticipation of
those sales, could adversely affect market prices prevailing
from time to time and could impair our ability to raise capital
through sales of our equity securities.
</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>Sales of Restricted Shares</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;&nbsp;&nbsp;&nbsp;&nbsp;
Upon the closing of this offering, we will have outstanding an
aggregate 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 common stock. Of these
shares, &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 to be sold in this offering,
or &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
if the underwriters exercise their over-allotment option in
full, will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are
held by any of our affiliates, as that term is defined in
Rule&nbsp;144 of the Securities Act. All remaining shares were
issued and sold by us in private transactions and are eligible
for public sale only if registered under the Securities Act or
sold in accordance with Rule&nbsp;144, including
Rule&nbsp;144(k), or Rule&nbsp;701, each of which is discussed
below. In addition, upon completion of this offering, we will
have outstanding stock options held by employees and directors
for the purchase
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.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
All of our officers and directors and substantially all of our
stockholders are subject to lock-up agreements under which they
have agreed not to transfer or dispose of, directly or
indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of
common stock, for a period of 180&nbsp;days after the date of
this prospectus, which is subject to extension in some
circumstances, as discussed 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;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of the lock-up agreements described below and the
provisions of Rule&nbsp;144, Rule&nbsp;144(k) and Rule&nbsp;701
under the Securities Act, the shares of our common stock
(excluding the shares to be sold in this offering) will be
available for sale in the public market as follows:
</DIV>

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    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</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 eligible for sale on the date of this prospectus;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</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 eligible for sale under Rule&nbsp;144 or Rule 701 ninety
    days after the date of this prospectus; and</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</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 eligible for sale upon the expiration of the lock-up
    agreements, as more particularly and except as described below,
    beginning after expiration of the lock-up period pursuant to
    Rule&nbsp;144, Rule&nbsp;144(k) or Rule&nbsp;701.</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;&nbsp;&nbsp;&nbsp;&nbsp;
We expect the
remaining &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
to become eligible for future sale in the public market pursuant
to Rule&nbsp;144 at varying times after one year from the date
of this prospectus.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
In general, under Rule&nbsp;144, beginning 90&nbsp;days after
the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be
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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    <TD width="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    1% of the number of shares of common stock then outstanding,
    which will equal
    approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    immediately after this offering;&nbsp;or</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the average weekly trading volume of the common stock on the
    Nasdaq National Market during the four calendar weeks preceding
    the filing of a notice on Form&nbsp;144 with respect to the 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;&nbsp;&nbsp;&nbsp;&nbsp;
Sales under Rule&nbsp;144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us. Upon completion of the
180-day lock-up period,
</DIV>

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<DIV align="left" style="font-size: 10pt;">
subject to any extension of the lock-up period under
circumstances described below, substantially all of our
outstanding restricted securities will be eligible for sale
under Rule&nbsp;144.
</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(k)</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;&nbsp;&nbsp;&nbsp;&nbsp;
Subject to the lock-up agreements described below, shares of our
common stock eligible for sale under Rule&nbsp;144(k) may be
sold immediately upon the completion of this offering. In
general, under Rule&nbsp;144(k), a person may sell shares of
common stock acquired from us immediately upon completion of
this offering, without regard to manner of sale, the
availability of public information or volume, if:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the person is not our affiliate and has not been our affiliate
    at any time during the three months preceding such a sale; 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 person has beneficially owned the shares proposed to be sold
    for at least two years, including the holding period of any
    prior owner other than an affiliate.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Upon expiration of the lock-up period, unless held by our
affiliates,
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock will be eligible for sale under 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>Rule&nbsp;701</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;&nbsp;&nbsp;&nbsp;&nbsp;
In general, under Rule&nbsp;701 of the Securities Act, any of
our employees, consultants or advisors who purchased shares from
us in connection with a qualified compensatory stock plan or
other written agreement are eligible to resell those shares
90&nbsp;days after the effective date of this offering in
reliance on Rule&nbsp;144 but without compliance with various
restrictions, including the holding period, contained in
Rule&nbsp;144. Subject to the lock-up period,
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock will be eligible for sale in accordance with
Rule&nbsp;701.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
The holders of substantially all of our currently outstanding
stock have agreed that, subject to the exceptions described in
the &#147;Underwriters&#148; section, without the prior written
consent of Merrill Lynch, Pierce, Fenner &#38; Smith
Incorporated and Morgan Stanley &#38; Co. Incorporated on behalf
of the underwriters, they will not, during the period ending
180&nbsp;days after the date of this prospectus:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    offer, pledge, sell, contract to sell, sell any option or
    contract to purchase, purchase any option or contract to sell,
    grant any option, right or warrant for the sale of or otherwise
    dispose of or transfer directly or indirectly, any shares of
    common stock or any securities convertible into or exercisable
    or exchangeable for common stock; or</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    enter into any swap or other arrangement that transfers to
    another, in whole or in part, any of the economic consequences
    of ownership of the common stock or any securities convertible
    into or exchangeable for 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;">
whether any transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise.
</DIV>

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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;&nbsp;&nbsp;&nbsp;&nbsp;
Upon completion of this offering, the holders of an aggregate of
approximately &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 plus shares issuable upon exercise of our
outstanding warrants will have the right to require us to
register these shares under the Securities Act under certain
circumstances. After registration pursuant to these rights,
these shares will become freely tradable without restriction
under the Securities Act. For more information regarding these
registration rights, see &#147;Description of Capital
Stock&nbsp;&#150; Registration Rights.&#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>Stock Options</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;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to file a registration statement under the Securities
Act covering up to 11,500,000 shares of common stock reserved
for issuance under our 1999 Long-Term Incentive Plan. This
registration statement is expected to be filed soon after the
date of this prospectus and will automatically become effective
upon filing. Accordingly, shares registered under such
registration statement will be available for sale in the open
market, unless such shares are subject to vesting restrictions
with us or are otherwise subject to the lock-up agreements
described 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>Warrants</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;&nbsp;&nbsp;&nbsp;&nbsp;
Upon completion of this offering, there will be warrants
outstanding to purchase 9,561,971 shares of common stock with a
weighted average exercise price of $0.61 per share.
</DIV>

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<DIV align="left" style="font-size: 10pt;">
<A name='117'></A>
</DIV>

<!-- link1 "FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON 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>FEDERAL INCOME TAX CONSEQUENCES TO</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>NON-U.S.&nbsp;HOLDERS OF COMMON STOCK</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;&nbsp;&nbsp;&nbsp;&nbsp;
The following is a general discussion of the material
U.S.&nbsp;federal income and estate tax consequences of the
ownership and disposition of our common stock that may be
relevant to you if you are a non-U.S.&nbsp;holder that acquires
our common stock pursuant to this offering. This discussion is
limited to non-U.S.&nbsp;holders who hold our common stock as a
capital asset within the meaning of Section&nbsp;1221 of the
Code.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This discussion does not address all aspects of
U.S.&nbsp;federal income and estate taxation that may be
relevant to you in light of your particular circumstances, and
does not address any foreign, state or local tax consequences.
Furthermore, this discussion does not consider specific facts
and circumstances that may be relevant to a particular
non-U.S.&nbsp;holder&#146;s tax position, specific rules that
may apply to certain non-U.S.&nbsp;holders, including banks,
insurance companies, or other financial institutions,
partnerships or other pass-through entities,
U.S.&nbsp;expatriates, dealers and traders in securities, or
special tax rules that may apply to a non-U.S.&nbsp;holder that
holds our common stock as part of a straddle, hedge or
conversion transaction. This discussion is based on provisions
of the Code, Treasury Regulations and administrative and
judicial interpretations as of the date of this prospectus. All
of these are subject to change, possibly with retroactive
effect, or different interpretations. If you are considering
buying our common stock, you should consult your own tax advisor
about current and possible future tax consequences of holding
and disposing of our common stock in your particular situation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For purposes of this discussion, a non-U.S.&nbsp;holder is a
beneficial owner of common stock if that individual is any of
the following for U.S.&nbsp;federal income tax purposes:
</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 width="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a nonresident alien individual within the meaning of
    Section&nbsp;7701(b) of the Code;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a foreign corporation within the meaning of Section&nbsp;7701(a)
    of the Code or other foreign entity taxable as a foreign
    corporation under U.S.&nbsp;federal income tax law;&nbsp;or</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a foreign estate or trust within the meaning of
    Section&nbsp;7701(a) of the Code.</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;&nbsp;&nbsp;&nbsp;&nbsp;
If an entity treated as a partnership for U.S.&nbsp;federal
income tax purposes holds shares of common stock, the tax
treatment of a partner generally will depend on the status of
the partner and upon the activities of the partnership. If you
are a partner of a partnership holding shares of our common
stock, we suggest you consult your own tax advisor.
</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>Distributions</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;&nbsp;&nbsp;&nbsp;&nbsp;
If distributions are paid on the shares of our common stock,
these distributions generally will constitute dividends for
U.S.&nbsp;federal income tax purposes to the extent paid from
our current or accumulated earnings and profits, as determined
under U.S.&nbsp;federal income tax principles, and then will
constitute a return of capital that is applied against your tax
basis in the common stock to the extent these distributions
exceed those earnings and profits. Distributions in excess of
our current and accumulated earnings and profits and your tax
basis in the common stock (determined on a share by share basis)
will be treated as a gain from the sale or exchange of the
common stock, the treatment of which is discussed below.
Dividends paid to a non-U.S.&nbsp;holder that are not
effectively connected with the conduct of a U.S.&nbsp;trade or
business of the non-U.S.&nbsp;holder will be subject to
U.S.&nbsp;federal withholding tax at a 30% rate or, if an income
tax treaty applies and certain information reporting
requirements are satisfied, a lower rate specified by the
treaty. Non-U.S.&nbsp;holders should consult their tax advisors
regarding their entitlement to benefits under a relevant tax
treaty.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The U.S.&nbsp;federal withholding tax generally is imposed on
the gross amount of a distribution, regardless of whether we
have sufficient earnings and profits to cause the distribution
to be a dividend for U.S.&nbsp;federal income tax purposes.
However, we may elect to withhold on less than the gross amount
of the
</DIV>

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<DIV align="left" style="font-size: 10pt;">
distribution if we determine that the distribution is not paid
out of our current or accumulated earnings and profits, based on
our reasonable estimates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A non-U.S.&nbsp;holder eligible for a reduced rate of
U.S.&nbsp;federal withholding tax under a tax treaty may
establish entitlement to the benefit of a reduced rate of
withholding under such tax treaty by timely filing a properly
completed Form&nbsp;W-8BEN with us prior to the payment of a
dividend. A non-U.S.&nbsp;holder eligible for a reduced rate of
U.S.&nbsp;federal withholding tax under a tax treaty may obtain
a refund of any excess amounts withheld by filing an appropriate
claim for a refund together with the required information with
the Internal Revenue Service.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Dividends that are effectively connected with a
non-U.S.&nbsp;holder&#146;s conduct of a trade or business
within the United States and, if an applicable tax treaty so
provides, are also attributable to a non-U.S.&nbsp;holder&#146;s
U.S.&nbsp;permanent establishment, are exempt from
U.S.&nbsp;federal withholding tax if the non-U.S.&nbsp;holder
furnishes to us or our paying agent a properly completed IRS
Form&nbsp;W-8ECI (or successor form) containing the
non-U.S.&nbsp;holder&#146;s taxpayer identification number.
However, dividends exempt from U.S.&nbsp;federal withholding tax
because they are &#147;effectively connected&#148; or
attributable to a U.S.&nbsp;permanent establishment under an
applicable tax treaty are subject to U.S.&nbsp;federal income
tax on a net income basis at the regular graduated
U.S.&nbsp;federal income tax rates. Any such effectively
connected dividends received by a foreign corporation may, under
certain circumstances, be subject to an additional &#147;branch
profits tax&#148; at a 30% rate or a lower rate specified by an
applicable tax treaty.
</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>Gain on Disposition of 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;&nbsp;&nbsp;&nbsp;&nbsp;
A non-U.S.&nbsp;holder generally will not be subject to
U.S.&nbsp;federal income tax or withholding tax with respect to
gain recognized on a sale or other disposition of common stock
unless one of the following applies:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    The gain is effectively connected with a
    non-U.S.&nbsp;holder&#146;s conduct of a trade or business
    within the United States and, if an applicable tax treaty so
    provides, the gain is also attributable to a
    non-U.S.&nbsp;holder&#146;s U.S.&nbsp;permanent establishment.
    In such a case, unless an applicable tax treaty provides
    otherwise, the non-U.S.&nbsp;holder generally will be taxed on
    its net gain derived from the sale at regular graduated
    U.S.&nbsp;federal income tax rates, and in the case of a foreign
    corporation, may also be subject to an additional branch profits
    tax as described above.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    A non-U.S.&nbsp;holder who is an individual holds our common
    stock as a capital asset and is present in the United States for
    183 or more days in the taxable year of the sale or other
    disposition, and certain other conditions are met. In such a
    case, the non-U.S.&nbsp;holder will be subject to a flat 30% tax
    on the gain derived from the sale, which may be offset by
    certain U.S.&nbsp;capital losses realized in the taxable year of
    the sale or other disposition.</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    At any time during the shorter of the 5&nbsp;year period ending
    on the date of a sale or other disposition of our stock or the
    period that the non-U.S.&nbsp;holder held our common stock, our
    company is classified as a United States Real Property Holding
    Corporation, generally defined as a corporation, the fair market
    value of whose real property interests equals or exceeds 50% of
    the fair market value of its U.S.&nbsp;real property interests,
    its interests in real property located outside the United States
    and any other of its assets used or held for use in a trade or
    business. Our company believes it is not and does not anticipate
    becoming a United States Real Property Holding Corporation for
    United States federal income tax purposes.</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>Information Reporting and Backup Withholding Tax</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;&nbsp;&nbsp;&nbsp;&nbsp;
We must report annually to the Internal Revenue Service and to
each non-U.S.&nbsp;holder the amount of dividends paid to that
holder and the tax withheld with respect to those dividends.
These information reporting requirements apply even if
withholding was not required. Pursuant to an applicable
</DIV>

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<DIV align="left" style="font-size: 10pt;">
tax treaty or other agreement, copies of the information returns
reporting those dividends and withholding may also be made
available to the tax authorities in the country in which the
non-U.S.&nbsp;holder resides.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under certain circumstances, Treasury regulations require
information reporting and backup withholding (currently at a
rate of 28%), on certain payments on common stock. A
non-U.S.&nbsp;holder of common stock that fails to certify its
non-U.S.&nbsp;holder status in accordance with applicable
Treasury regulations or otherwise establish an exemption may be
subject to information reporting and this backup withholding tax
on payments of 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;&nbsp;&nbsp;&nbsp;&nbsp;
Payment of the proceeds of a sale of our common stock by or
through a U.S.&nbsp;office of a broker is subject to both
information reporting and backup withholding unless the
non-U.S.&nbsp;holder certifies to the payor in the manner
required as to its non-U.S.&nbsp;status under penalties of
perjury or otherwise establishes an exemption. As a general
matter, information reporting and backup withholding will not
apply to a payment of the proceeds of a sale of our common stock
by or through a foreign office of a foreign broker effected
outside the United States. However, information reporting
requirements, but not backup withholding, will apply to payment
of the proceeds of a sale of our common stock by or through a
foreign office of a broker effected outside the United States if
that broker is:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a U.S.&nbsp;person,</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a foreign person that derives 50% or more of its gross income
    for specified periods from the conduct of a trade or business in
    the United States,</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a &#147;controlled foreign corporation&#148; as defined in the
    Code,&nbsp;or</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    a foreign partnership that at any time during its tax year
    either (i)&nbsp;has one or more U.S.&nbsp;persons that, in the
    aggregate, own more than 50% of the income or capital interests
    in the partnership or (ii)&nbsp;is engaged in the conduct of a
    trade or business in the United States.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Information reporting requirements will not apply to the payment
of the proceeds of a sale of our common stock if the broker
receives a statement from the owner, signed under penalty of
perjury, certifying such owner&#146;s non-U.S.&nbsp;status or an
exemption is otherwise established. Non-U.S.&nbsp;holders should
consult their own tax advisors regarding the application of the
information reporting and backup withholding rules to 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;&nbsp;&nbsp;&nbsp;&nbsp;
Amounts withheld under the backup withholding rules do not
constitute a separate U.S.&nbsp;federal income tax. Rather, any
amounts withheld under the backup withholding rules will be
refunded or allowed as a credit against the holder&#146;s
U.S.&nbsp;federal income tax liability, if any, provided the
required information and appropriate claim for refund is filed
with the Internal Revenue Service.
</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>Federal Estate Tax</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;&nbsp;&nbsp;&nbsp;&nbsp;
Common stock owned or treated as owned by an individual who is
not a citizen or resident, as defined for U.S.&nbsp;federal
estate tax purposes, of the United States at the time of death
will be included in that individual&#146;s gross estate for
U.S.&nbsp;federal estate tax purposes and may be subject to
U.S.&nbsp;federal estate tax, unless an applicable estate tax
treaty provides 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;&nbsp;&nbsp;&nbsp;&nbsp;
The foregoing discussion is a summary of the material federal
tax consequences of the ownership, sale or other disposition of
our common stock by non-U.S.&nbsp;holders for U.S.&nbsp;federal
income and estate tax purposes. You are urged to consult your
own tax advisor with respect to the particular tax consequences
to you of ownership and disposition of our common stock,
including the effect of any state, local, non-U.S.&nbsp;or other
tax laws.
</DIV>

<P align="center" style="font-size: 10pt;">85

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<DIV align="left" style="font-size: 10pt;">
<A name='118'></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;&nbsp;&nbsp;&nbsp;&nbsp;
Under the terms and subject to the conditions contained in a
purchase agreement dated the date of this prospectus, the
underwriters named below, for whom Merrill Lynch, Pierce,
Fenner&nbsp;&#38; Smith Incorporated, Morgan Stanley&nbsp;&#38;
Co. Incorporated, Deutsche Bank Securities and RBC Capital
Markets Corporation are acting as representatives, have
severally agreed to purchase, and we and the selling
stockholders have agreed to sell to them, severally, the number
of shares indicated below:
</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="5%">&nbsp;</TD>
    <TD width="3%">&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>Number of</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>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">
    Merrill Lynch, Pierce, Fenner &#38; Smith<BR>
    Incorporated</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">
    Morgan Stanley&nbsp;&#38; Co. Incorporated</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">
    Deutsche Bank Securities</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">
    RBC Capital Markets Corporation</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: 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">&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>

</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;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters are offering the shares of common stock subject
to their acceptance of the shares and subject to prior sale. The
purchase agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of
common stock offered by this prospectus are subject to the
approval of specified legal matters by their counsel and to
other conditions. The underwriters are obligated to take and pay
for all of the shares of common stock offered by this prospectus
if any such shares are taken. If an underwriter defaults, the
purchase agreement provides that the purchase commitments of the
non-defaulting underwriters may be increased or the purchase
agreement may be terminated. However, the underwriters are not
required to take or pay for the shares covered by the
underwriters&#146; over-allotment option described below. We and
the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act or 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: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed five percent of the total
number of shares of common stock offered 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;&nbsp;&nbsp;&nbsp;&nbsp;
A prospectus in electronic format will be made available on the
websites maintained by one or more of the joint book-running
managers of this offering and may also be made available on
websites maintained by other underwriters. The underwriters may
agree to allocate a number of shares to underwriters for sale to
their online brokerage account holders. Internet distributions
will be allocated by joint book-running managers to underwriters
that may make internet distributions on the same basis as other
allocations.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the public offering
price listed on the cover page of this prospectus and part to
certain dealers at a price that represents a concession not in
excess of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a
share under the public offering price. Any underwriter may
allow, and such dealers may reallow, a concession not in excess
of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;a
share to other underwriters or to certain dealers. After the
initial offering of the shares of common stock, the offering
price and other selling terms may from time to time be varied by
the representatives.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table shows the underwriting discount and
commissions that we and the selling stockholders are to pay to
the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the
underwriters&#146; option to purchase additional shares of our
common stock.
</DIV>

<P align="center" style="font-size: 10pt;">86

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<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="36%">&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>
    <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="6" align="center" nowrap><B>Paid by Us</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Paid by Selling Stockholders</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No Exercise</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Full Exercise</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No Exercise</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Full 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>
    <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>
    <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>
    <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;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, we estimate that the expenses of this offering
payable by us and the selling stockholders 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>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;&nbsp;&nbsp;&nbsp;&nbsp;
We have granted to the underwriters an option, exercisable for
30&nbsp;days from the date of this prospectus, to purchase up to
an aggregate
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
shares of common stock at the public offering price listed on
the cover page of this prospectus, less the underwriting
discount and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the
option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase a number of
additional shares proportionate to that of common stock as the
underwriter&#146;s initial amount reflected in the above table.
If the underwriters&#146; option is exercised in full, the total
price to the public would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
the total proceeds to us would be $&nbsp;after deducting the
underwriting discount and commissions and estimated offering
expenses.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
We, each of our directors and officers the selling stockholders
and the other holders of substantially all of our outstanding
stock have agreed that, without the prior written consent of
Merrill Lynch, Pierce, Fenner&nbsp;&#38; Smith Incorporated and
Morgan Stanley&nbsp;&#38; Co. Incorporated on behalf of the
underwriters, we and they will not, during the period ending
180&nbsp;days after the date of this prospectus:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    offer, pledge, sell, contract to sell, sell any option or
    contract to purchase, purchase any option or contract to sell,
    grant any option, right or warrant for the sale of or otherwise
    dispose of or transfer directly or indirectly, any shares of
    common stock or any securities convertible into or exercisable
    or exchangeable for common stock;&nbsp;or</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    enter into any swap or other arrangement that transfers to
    another, in whole or in part, any of the economic consequences
    of ownership of the common stock or any securities convertible
    into or exercisable or exchangeable for 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;">
whether any transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. These restrictions do not apply to:
</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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the sale of shares to the underwriters;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the issuance by us of shares of common stock upon the exercise
    of an option or a warrant or the conversion of a security
    outstanding on the date of this prospectus that is described in
    this prospectus;</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    the issuance by us of options to purchase shares of common stock
    pursuant to our existing stock incentive plans for employees and
    nonemployee directors described in this prospectus, provided
    that the options do not become vested and exercisable during the
    period referred to in this paragraph&nbsp;(subject to extension
    as provided below);</TD>
</TR>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    transactions by any person other than us relating to shares of
    common stock or other securities acquired in open market
    transactions after the completion of the offering of the shares
    or reserved shares purchased in the offering, provided that the
    transfer is not required to be reported in any public report or
    filing with the SEC or otherwise and the transferor does not
    voluntarily make such report within one week of the
    transfer;&nbsp;or</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">87

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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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;</TD>
    <TD align="left">
    transfers not involving dispositions for value by any person
    other than us by gift, to a trust for the benefit of immediate
    family members, as a distribution to limited partners or
    stockholders of the transferor or to any investment fund or
    other entity controlled or managed by the transferor provided
    that the transferee agrees to be bound by such restrictions and
    the transfer is not required to be reported in any public report
    or filing with the SEC or otherwise and the transferor does not
    voluntarily make such report.</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>Price Stabilization and 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;&nbsp;&nbsp;&nbsp;&nbsp;
In order to facilitate the offering of the common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the purchase agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over-allotment option. The underwriters may also sell
shares in excess of the over-allotment option, creating a naked
short position. 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 after pricing that could
adversely affect investors who purchase in this offering. In
addition, to stabilize the price of the common stock, the
underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in this offering, if
the syndicate repurchases previously distributed common stock in
transactions to cover syndicate short positions or to stabilize
the price of the common stock. Any of these activities may
stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities
at any time without notice.
</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>Reserved Shares</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;&nbsp;&nbsp;&nbsp;&nbsp;
At our request, the underwriters have reserved for sale, at the
initial public offering price, up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
offered in this prospectus for directors, officers, employees,
business associates and other persons with whom we have a
relationship. The number of shares of common stock available for
sale to the general public will be reduced to the extent these
persons purchase reserved shares. Any reserved shares which are
not purchased will be offered by the underwriters to the general
public on the same terms as the other shares offered by this
prospectus.
</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>Quotation on 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;&nbsp;&nbsp;&nbsp;&nbsp;
We expect the shares to be approved for quotation on the Nasdaq
National Market, subject to notice of issuance, under the symbol
&#147;ARxT&#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>Pricing of the Offering</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;&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 negotiations between us and the representatives.
Among the factors to be considered in determining the initial
public offering price will be our future prospects and those of
our industry in general, our revenues, earnings and other
financial operating information in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies
engaged in activities similar to ours.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
An active trading market for the shares may not develop. It is
possible that after the offering, the shares will not trade in
the public market at or above the initial public offering price.
</DIV>

<P align="center" style="font-size: 10pt;">88

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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>Other Relationships</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;&nbsp;&nbsp;&nbsp;&nbsp;
Certain of the underwriters or their affiliates have provided
from time to time, and may provide in the future, investment and
commercial banking and financial advisory services to us in the
ordinary course of business, for which they have received and
may continue to receive customary fees and commissions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Affiliates of Merrill Lynch, Pierce, Fenner&nbsp;&#38; Smith
Incorporated beneficially own 1,698,840&nbsp;shares of common
stock (assuming conversion of our Series&nbsp;B Preferred Stock
and Series&nbsp;C Preferred Stock) and 553,534 warrants to
purchase common stock, or 3.41%, of our common stock, which they
acquired in private transactions in July 2001, May 2003 and June
2003.
</DIV>

<DIV align="left" style="font-size: 10pt;">
<A name='119'></A>
</DIV>

<!-- link1 "LEGAL MATTERS" -->

<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;&nbsp;&nbsp;&nbsp;&nbsp;
Alston&nbsp;&#38; Bird LLP will pass upon the legality of the
shares of common stock to be issued in this offering.
Ropes&nbsp;&#38; Gray LLP will pass upon certain legal matters
in connection with this offering on behalf of the underwriters.
</DIV>

<DIV align="left" style="font-size: 10pt;">
<A name='120'></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;&nbsp;&nbsp;&nbsp;&nbsp;
Ernst&nbsp;&#38; Young LLP, independent registered public
accounting firm, has audited our financial statements and
schedule at June&nbsp;30, 2004 and 2003 and for each of the
three years in the period ended June&nbsp;30, 2004 as set forth
in their report. We have included our financial statements and
schedule in this prospectus and elsewhere in the registration
statement in reliance on Ernst &#38; Young LLP&#146;s report
given on their authority as experts on accounting and auditing.
</DIV>

<DIV align="left" style="font-size: 10pt;">
<A name='121'></A>
</DIV>

<!-- link1 "WHERE YOU CAN FIND MORE 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>WHERE YOU CAN FIND MORE 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;&nbsp;&nbsp;&nbsp;&nbsp;
We have filed with the Securities and Exchange Commission (SEC),
Washington,&nbsp;D.C. 20549, a registration statement on
Form&nbsp;S-1 under the Securities Act of 1933, with respect to
our common stock offered hereby. This prospectus, which forms
part of the registration statement, does not contain all of the
information set forth in the registration statement and the
exhibits and schedules to the registration statement. Some items
are omitted in accordance with the rules and regulations of the
SEC. For further information about us and our common stock, we
refer you to the registration statement and the exhibits and
schedules to the registration statement filed as part of the
registration statement. Statements contained in this prospectus
as to the contents of any contract or other document filed as an
exhibit are qualified in all respects by reference to the actual
text of the exhibit. You may read and copy the registration
statement, including the exhibits and schedules to the
registration statement, at the SEC&#146;s Public Reference Room
at 450&nbsp;Fifth Street, N.W., Washington,&nbsp;D.C. 20549. You
can obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site at <I>www.sec.gov,</I> from which you
can electronically access the registration statement, including
the exhibits and schedules to 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;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of
1934, as amended. We will fulfill our obligations with respect
to such requirements by filing periodic reports and other
information with the SEC. We intend to furnish our stockholders
with annual reports containing financial statements certified by
an independent registered public accounting firm. We also
maintain an Internet site at <I>www.adamsrt.com.</I> Our
internet site is not a part of this prospectus.
</DIV>

<P align="center" style="font-size: 10pt;">89
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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>Adams Laboratories, 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='122'></A>
</DIV>

<!-- link1 "Index to Financial Statements and Schedule" -->

<DIV align="center" style="font-size: 10pt;">
<B>Index to Financial Statements and 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="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">
    Report of Independent Registered Public Accounting Firm</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>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance Sheets as of December&nbsp;31, 2004 (unaudited),
    June&nbsp;30, 2004 and 2003</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 valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Statements of Operations for the six months ended
    December&nbsp;31, 2004 and 2003 (unaudited) and the years ended
    June&nbsp;30, 2004, 2003 and 2002</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">
    Statements of Redeemable Convertible Preferred Stock and
    Stockholders&#146; Equity (Deficit) for the six months ended
    December&nbsp;31, 2004 (unaudited) and the years ended
    June&nbsp;30, 2004, 2003 and 2002</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">
    Statements of Cash Flows for the six months ended
    December&nbsp;31, 2004 and 2003 (unaudited) and the years ended
    June&nbsp;30, 2004, 2003 and 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-7</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Notes to Financial Statements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Schedule of Valuation and Qualifying Accounts</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-28</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<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>Report of Independent Registered Public Accounting Firm</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;">
The Board of Directors and Stockholders
</DIV>

<DIV align="left" style="font-size: 10pt;">
Adams 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;&nbsp;&nbsp;&nbsp;&nbsp;
We have audited the accompanying balance sheets of Adams
Laboratories, Inc. as of June&nbsp;30, 2004 and 2003, and the
related statements of operations, redeemable convertible
preferred stock and stockholders&#146; equity (deficit)&nbsp;and
cash flows for each of the three years in the period ended
June&nbsp;30, 2004. Our audits also included the financial
statement schedule listed in the index on Page&nbsp;F-1 for each
of the three years in the period ended June&nbsp;30, 2004. 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 and schedule 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;&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 controls over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as 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;&nbsp;&nbsp;&nbsp;&nbsp;
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Adams Laboratories,&nbsp;Inc. at June&nbsp;30, 2004 and 2003,
and the results of its operations and its cash flows for the
three years in the period ended June&nbsp;30, 2004 in conformity
with U.S.&nbsp;generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule for
each of the three years in the period ended June&nbsp;30, 2004,
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 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="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="center">
    <FONT style="font-variant:SMALL-CAPS">/s/ Ernst &#38; Young LLP
    </FONT></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;">
New York, New York
</DIV>

<DIV align="left" style="font-size: 10pt;">
March&nbsp;23, 2005
</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>Adams Laboratories, 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>Balance Sheets</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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="60%">&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="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>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>June&nbsp;30,</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>December&nbsp;31,</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 colspan="2">&nbsp;</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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</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>(unaudited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</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">$</TD>
    <TD align="right" valign="bottom" nowrap>26,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>43,391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,405</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Short-term investments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,948</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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts receivable, net of allowance for doubtful accounts of
    $201 at December&nbsp;31, 2004 (unaudited)&nbsp;and $203 and $35
    at June&nbsp;30, 2004 and 2003, respectively</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,720</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,675</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,633</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Inventories, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,860</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 expenses and other assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,670</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>682</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>363</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD 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>7,173</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,337</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 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>75,135</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>61,601</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,261</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">
    Property, plant and equipment, net of accumulated depreciation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,934</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,112</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 assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,678</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,456</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">
    AlleRx&#174; license, net of accumulated amortization of $342 at
    December&nbsp;31, 2004 (unaudited) and $292 and $192 at
    June&nbsp;30, 2004 and 2003, respectively</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,158</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>308</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">
    Other assets, net of accumulated amortization of $341 at
    December&nbsp;31, 2004 (unaudited) and $158 and $227 at
    June&nbsp;30, 2004 and 2003, respectively</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,072</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,254</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,701</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">$</TD>
    <TD align="right" valign="bottom" nowrap>85,977</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>71,035</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>20,382</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 Notes to Financial Statements which are an integral part of
these statements.
</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;">
<B>Adams Laboratories, 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>Balance Sheets&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(In thousands, except per share amounts)</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="3%">&nbsp;</TD>
    <TD width="52%">&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="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>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>June&nbsp;30,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December&nbsp;31,</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 colspan="4">&nbsp;</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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&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="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="16" align="center" valign="top">
    <B>LIABILITIES AND STOCKHOLDERS&#146; EQUITY (DEFICIT)</B></TD>
</TR>

<TR>
    <TD colspan="4" 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 colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,519</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,953</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>634</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued compensation and related items</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,824</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,745</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>651</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued returns, chargebacks and rebates</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,763</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,954</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,649</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued litigation settlement</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>2,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income taxes payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>269</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 colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Payable for AlleRx&#174; license</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,000</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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,798</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,097</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&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="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,029</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,450</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,031</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&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="4" 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>&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="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Convertible notes payable</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>13,785</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred gain on sale of plant assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,563</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,647</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 colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued royalties</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>953</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,084</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,088</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&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="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,904</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&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="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Redeemable convertible 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>
    <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>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;A, $0.01&nbsp;par value:</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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Authorized shares&nbsp;&#151; 15,000</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issued and outstanding shares&nbsp;&#151; 12,271 at
    December&nbsp;31, 2004 (unaudited)&nbsp;and at June 30, 2004 and
    2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,639</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;B, $0.01&nbsp;par value:</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Authorized shares&nbsp;&#151; 20,000</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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issued and outstanding shares&nbsp;&#151; 16,129 at
    December&nbsp;31, 2004 (unaudited)&nbsp;and at June 30, 2004 and
    2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,008</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Series&nbsp;C, $0.01&nbsp;par value:</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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Authorized shares&nbsp;&#151; 15,000</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issued and outstanding shares&nbsp;&#151; 13,815 at
    December&nbsp;31, 2004 (unaudited)&nbsp;and at June 30, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>99,468</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>58,783</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 colspan="4">&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="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total redeemable convertible preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>236,429</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>110,851</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60,647</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&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="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stockholders&#146; deficit:</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="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common stock, Class&nbsp;A, $0.01&nbsp;par value:</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Authorized shares&nbsp;&#151; 100,000</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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issued and outstanding shares&nbsp;&#151; 17,362 at
    December&nbsp;31, 2004 (unaudited)&nbsp;and 14,843 and 8,832 at
    June 30, 2004 and 2003, respectively</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>174</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>88</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" 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>(152,518</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(27,264</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,450</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" 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>(20,653</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(29,881</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(65,707</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&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="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total stockholders&#146; deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(172,997</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(56,997</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(64,169</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&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="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total liabilities, redeemable convertible preferred stock and
    stockholders&#146; deficit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>85,977</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>71,035</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>20,382</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&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 Notes to Financial Statements which are an integral part of
these statements.
</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>Adams Laboratories, 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>Statements of Operations</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(In thousands, except per share amounts)</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="42%">&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="3%">&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 colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Six Months Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&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>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended June&nbsp;30,</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>
    <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>2004</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>
    <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>2002</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>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net sales</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>62,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>27,074</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>61,295</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>14,038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>13,755</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of goods sold</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,049</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,928</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,252</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,024</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross margin</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48,671</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,025</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,367</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,786</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,731</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling, marketing&nbsp;&#38; administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,768</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,834</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,968</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">
    Product development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,719</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,419</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>52</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,582</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,601</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">
    Interest income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(294</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(52</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</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</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(180</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>

</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,585</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,083</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,665</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>31,424</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,207</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income/(loss) before income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,086</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,702</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(22,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,476</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">
    Provision/(benefit) for income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,858</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>(16,124</TD>
    <TD align="left" valign="bottom" nowrap>)</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 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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income/(loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35,826</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(22,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,476</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accretion of preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,953</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(320</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(590</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(627</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(619</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net (loss)/income applicable to common stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1,725</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>8,622</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>35,236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(23,265</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(16,095</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    (Loss)/earnings per common 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">&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">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.64</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.83</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">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1.43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.64</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.83</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">
    Weighted-average of common shares used in (loss)/ earnings per
    share calculation</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">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,161</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,387</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,827</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,803</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">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,552</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,827</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,803</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma earnings per common 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">&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">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.58</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">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.49</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="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Shares used in pro forma earnings per common share calculation</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">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,817</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>61,379</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">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>78,957</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>72,577</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="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
See Notes to Financials Statements which are an integral part of
these statements.
</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>Adams Laboratories, 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>Statements of Redeemable Convertible Preferred Stock and
Stockholders&#146; Equity (Deficit)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>(Amounts in thousands)</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 8pt; margin-top: 12pt; ">

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


<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>Preferred Stock</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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="3">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
    <TD style="border-right:1.5pt solid #000000;">&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="3">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Redeemable</B></TD><TD></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&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>Total</B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Series&nbsp;A</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Series&nbsp;B</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Series&nbsp;C</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Convertible</B></TD><TD></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Common Stock</B></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="2" align="center" nowrap><B>Stockholders&#146;</B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <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="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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Preferred</B></TD><TD></TD>
    <TD style="border-right:1.5pt solid #000000;">&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>Paid-In</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>Equity/</B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <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>Amount</B></TD><TD></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>Amount</B></TD><TD></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>Amount</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Stock</B></TD><TD></TD>
    <TD style="border-right:1.5pt solid #000000;">&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>Amount</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>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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD style="border-right:1.5pt 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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance as of July&nbsp;1, 2001</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,271</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>36,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#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">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>36,620</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,799</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>88</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(7,216</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(27,593</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(34,721</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">
    Issuance of preferred stock, net</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>14,219</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21,393</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>21,393</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Conversion of notes payable</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>1,910</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,219</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>3,219</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock option compensation expense</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>&#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 style="border-right:1.5pt solid #000000;">&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>1,292</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>1,292</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">
    Exercise of stock options</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>&#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 style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5</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>7</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>7</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accretion of 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>216</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>7,403</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>7,619</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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>(7,619</TD>
    <TD align="left" valign="bottom" nowrap>)</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>(7,619</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">
    Net loss</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>&#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 style="border-right:1.5pt solid #000000;">&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>(15,476</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,476</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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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">
    Balance as of June&nbsp;30, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,271</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>36,836</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,129</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>32,015</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">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>68,851</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,804</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>88</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(13,536</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(43,069</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(56,517</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">
    Issuance of common stock warrants and recognition of beneficial
    conversion feature related to bridge financing</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>&#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 style="border-right:1.5pt solid #000000;">&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>2,981</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>2,981</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of common stock warrants related to Series&nbsp;C Notes</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>&#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 style="border-right:1.5pt solid #000000;">&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>2,888</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>2,888</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">
    Stock option compensation expense</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>&#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 style="border-right:1.5pt solid #000000;">&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>880</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>880</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Exercise of stock options</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>&#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 style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23</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>33</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>33</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">
    Exercise of warrants</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>&#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 style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5</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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accretion of 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>(4,197</TD>
    <TD align="left" valign="bottom" nowrap>)</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>(4,007</TD>
    <TD align="left" valign="bottom" nowrap>)</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>(8,204</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD style="border-right:1.5pt solid #000000;">&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>8,204</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>8,204</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">
    Net loss</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>&#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 style="border-right:1.5pt solid #000000;">&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>(22,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(22,638</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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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">
    Balance as of June&nbsp;30, 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,271</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>32,639</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,129</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>28,008</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">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>60,647</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,832</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>88</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,450</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(65,707</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(64,169</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">
    Issuance of common stock warrants related to Series&nbsp;C Notes</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>&#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 style="border-right:1.5pt solid #000000;">&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>811</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>811</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of preferred stock, net</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>13,815</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,104</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,104</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Reverse unamortized debt discount upon conversion of
    Series&nbsp;C 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>&#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>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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>(2,119</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,119</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">
    Stock option compensation expense</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>&#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 style="border-right:1.5pt solid #000000;">&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>686</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>686</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">
    Exercise of stock options</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>&#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 style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>62</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</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>9</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Exercise of warrants</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>&#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 style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,949</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59</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>59</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">
    Accretion of 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>(6,378</TD>
    <TD align="left" valign="bottom" nowrap>)</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>(2,201</TD>
    <TD align="left" valign="bottom" nowrap>)</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>36,679</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,100</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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>(28,100</TD>
    <TD align="left" valign="bottom" nowrap>)</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>(28,100</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 income</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>&#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 style="border-right:1.5pt solid #000000;">&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>35,826</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35,826</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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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 as of June&nbsp;30, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,271</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>26,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,129</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>25,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,815</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>58,783</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>110,851</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,843</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(27,264</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(29,881</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(56,997</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">
    Stock option compensation expense (unaudited)</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>&#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 style="border-right:1.5pt solid #000000;">&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>179</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>179</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">
    Exercise of stock options (unaudited)</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>&#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 style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13</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>14</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Exercise of warrants (unaudited)</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>&#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 style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,420</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>132</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>157</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">
    Accretion of 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>46,183</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>38,710</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>40,685</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>125,578</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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>(125,578</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(125,578</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 income (unaudited)</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>&#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 style="border-right:1.5pt solid #000000;">&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>9,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,228</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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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 as of December&nbsp;31, 2004 (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,271</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>72,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,129</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>64,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,815</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>99,468</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>236,429</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,362</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>174</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(152,518</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(20,653</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(172,997</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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-right:1.5pt solid #000000;">&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 Notes to Financials Statements which are an integral part of
these statements.
</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; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Adams Laboratories, 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>Statements of Cash Flows</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands)</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="3%">&nbsp;</TD>
    <TD width="47%">&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>
    <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="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Six Months Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended June&nbsp;30,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&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="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</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>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>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</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>
    <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="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(unaudited)</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>
</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>
    <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 income/(loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>8,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>35,826</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(22,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(15,476</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 income/(loss) to net cash (used
    in)/provided by 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>
    <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>327</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>538</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,043</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,235</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>981</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">
    Stock option compensation expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>179</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>343</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>686</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,292</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Non-cash interest capitalized in note principal</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>969</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>162</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">
    Non-cash interest on convertible notes payable</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>733</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>174</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Write off of trade name</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>205</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>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Non-cash interest on bridge loans</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>2,981</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Litigation settlement</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>(2,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,000</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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gain on sale of property, plant and equipment</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>(78</TD>
    <TD align="left" valign="bottom" nowrap>)</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss on equipment write-off</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>43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>417</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">
    Changes in operating 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>
    <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>(15,046</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,423</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,042</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,090</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>875</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">
    Inventories</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>664</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(442</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(656</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,441</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,618</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 expenses and other current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(832</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(265</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(838</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(544</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">
    Prepayment of advertising expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(8,155</TD>
    <TD align="left" valign="bottom" nowrap>)</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD 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>4,942</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>(16,793</TD>
    <TD align="left" valign="bottom" nowrap>)</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(221</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>265</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(160</TD>
    <TD align="left" valign="bottom" nowrap>)</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>&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>2,566</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>436</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,319</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(157</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">
    Income taxes payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(144</TD>
    <TD align="left" valign="bottom" nowrap>)</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</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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,779</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,199</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,903</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>
    <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">
    <B>Net cash (used in)/provided by operating activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,329</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,580</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,753</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(13,614</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,165</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>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>
    <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">
    Purchases of property, plant and equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,513</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(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>(530</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(402</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,411</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">
    Proceeds from sale of property, plant and equipment</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>5,580</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="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Purchase of short-term investments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(9,948</TD>
    <TD align="left" valign="bottom" nowrap>)</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="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Purchases of intangibles</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>(1,250</TD>
    <TD align="left" valign="bottom" nowrap>)</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</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>
    <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">
    <B>Net cash (used in)/provided by investing activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(11,461</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(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>3,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(402</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,911</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>
    <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">
    Proceeds from borrowings on equipment loan and line of credit</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>446</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Payments on equipment loan and line of credit</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>(89</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(271</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(170</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,005</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">
    Proceeds from issuance of convertible notes payable and bridge
    loan</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>4,636</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,636</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,286</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="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from issuance of redeemable preferred stock, net</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>21,393</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">
    Proceeds from exercise of warrants</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>157</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59</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="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from exercise of stock options</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</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>
    <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">
    <B>Net cash provided by financing activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>171</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,599</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,433</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,149</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,841</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Net (decrease)/increase in cash and cash equivalents</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(16,619</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,965</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,986</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,133</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,765</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>Cash and cash equivalents at beginning of period</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43,391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,272</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,507</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>
    <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">
    <B>Cash and cash equivalents at end of period</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>26,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>12,370</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>43,391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>7,272</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>
    <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 Cash Flow Information</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 colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash paid during the period for interest</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>225</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>917</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>14</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">
    Cash paid during the period for income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,060</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</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>

</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 Notes to Financials Statements which are an integral part of
these statements.
</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; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Adams Laboratories, 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</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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>Nature of Operations and Summary of Significant Accounting
    Policies</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;">
<B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Nature of Operations</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;&nbsp;&nbsp;&nbsp;&nbsp;
Adams Laboratories, Inc. (doing business as Adams Respiratory
Therapeutics) (&#147;the Company&#148;), a Texas corporation, is
a specialty pharmaceutical company focused on the late-stage
development, commercialization and marketing of over-the-counter
(&#147;OTC&#148;) and prescription pharmaceuticals for the
treatment of respiratory disorders. The Company currently
markets two OTC&nbsp;products under its Mucinex brand. The
Company&#146;s corporate offices are in Chester, New Jersey.
</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;Basis of Presentation</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company operates in one business segment, specialty
pharmaceuticals. The Company&#146;s &#147;fiscal year&#148; is
from July&nbsp;1 through June&nbsp;30.
</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;Use of Estimates</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;&nbsp;&nbsp;&nbsp;&nbsp;
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States
which require the use of judgments and estimates by management
that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those
estimates.
</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;Unaudited Interim Financial
Information</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;&nbsp;&nbsp;&nbsp;&nbsp;
The accompanying balance sheet as of December&nbsp;31, 2004, the
statements of operations and cash flows for the six months ended
December&nbsp;31, 2004 and 2003 and the statement of redeemable
convertible preferred stock and stockholders&#146; equity
(deficit)&nbsp;for the six months ended December&nbsp;31, 2004,
and the related information contained in the notes to financial
statements are unaudited. These unaudited interim financial
statements and notes have been prepared in accordance with
accounting principles generally accepted in the United States.
In the opinion of the Company&#146;s management, the unaudited
interim financial statements have been prepared on the same
basis as the audited financial statements and include all
adjustments, consisting of only normal recurring accruals,
necessary for the fair presentation of the Company&#146;s
financial position as of December&nbsp;31, 2004 and 2003, and
results of operations and cash flows for the six months ended
December&nbsp;31, 2004 and 2003. The results for the six months
ended December&nbsp;31, 2004 are not necessarily indicative of
the results to be expected for the year ended June&nbsp;30, 2005
or for any future interim period or for any future 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><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Derivative Financial
Instruments</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company holds no derivative financial instruments and does
not currently engage in hedging activities.
</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;Cash Equivalents</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company considers all highly liquid investments with a
maturity date of three months or less at the date of acquisition
to be cash equivalents.
</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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Short-term
Investments</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;&nbsp;&nbsp;&nbsp;&nbsp;
During the six months ended December&nbsp;31, 2004, the Company
has investments in debt securities that it considers
&#147;held-to-maturity&#148; under Statement of Financial
Accounting Standards (&#147;SFAS&#148;) No.&nbsp;115,
<I>Accounting for Certain Investments in Debt and Equity
Securities</I>. These investments have maturity dates greater
than three months, but less than six months. Unrealized gains
and losses related to these securities were not material as of
December&nbsp;31, 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><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounts Receivable</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;&nbsp;&nbsp;&nbsp;&nbsp;
Accounts receivable are generally billed on a net 30-day basis
with a 2%&nbsp;discount if paid within 30&nbsp;days.
Occasionally, the Company provides extended payment terms and
greater discounts to its customers to ensure adequate
distribution quantities of its products. Reserves for
uncollectible accounts receivable are established as a charge to
selling, marketing and administrative expenses at the time
collection becomes improbable. A reserve for cash discounts and
trade promotional programs, that are expected to be deducted
from the payments from our customers, is also recorded as a
reduction to sales when the revenue is recorded.
</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;Inventories</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;&nbsp;&nbsp;&nbsp;&nbsp;
Inventories are stated at the lower of first-in, first-out, cost
or market. The composition of inventories is 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="64%">&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="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="3%">&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>June&nbsp;30,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December&nbsp;31,</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>2004</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>2003</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">
    Finished goods</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,176</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,588</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>665</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <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">&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>989</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <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>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,436</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>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,176</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,588</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,090</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less: reserve for obsolescence</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(324</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(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>(1,230</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,860</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;&nbsp;&nbsp;&nbsp;&nbsp;
During April&nbsp;2004, the Company sold substantially all of
its manufacturing assets located in Fort Worth, Texas to
Cardinal Health PTS, LLC (&#147;Cardinal Health&#148;) and
simultaneously entered into a ten-year supply agreement
(&#147;Supply Agreement&#148;) (see Note&nbsp;9). As a result of
such sale and related Supply Agreement, the Company no longer
manufactures products and only carries finished goods in
inventory.
</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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property, Plant and
Equipment</I></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="61%">&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="2%">&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="3%">&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="6" align="center" nowrap><B>June&nbsp;30,</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>December&nbsp;31,</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 colspan="2">&nbsp;</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>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</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 valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Property, plant and equipment:</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">
    Machinery and equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>319</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>22</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>6,799</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">
    Leasehold improvements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>790</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>235</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>437</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Furniture and fixtures</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,204</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>538</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>796</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"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,313</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,032</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less: accumulated depreciation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(379</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(279</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,920</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"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1,934</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>4,112</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="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Property, plant and equipment is recorded at cost and
depreciated using the straight-line method over estimated useful
lives ranging from one to ten years. Leasehold improvements are
amortized over the estimated useful lives of the assets or
related lease terms, whichever is shorter. Expenditures for
repairs and maintenance are charged to expense as incurred;
betterments which materially prolong the lives of assets are
capitalized. Depreciation expense was $94 and $463 for the
unaudited six months ended December&nbsp;31, 2004 and 2003,
respectively. Depreciation expense was $716, $928 and $856 for
the fiscal years ended June&nbsp;30, 2004, 2003, and 2002,
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;&nbsp;&nbsp;&nbsp;&nbsp;
In April 2004, the Company sold substantially all of its
manufacturing assets located in Fort&nbsp;Worth, Texas to
Cardinal Health. In connection with the asset sale, the Company
entered into the Supply Agreement with Cardinal Health, whereby
Cardinal Health manufactures substantially all of the
Company&#146;s products. (See Note&nbsp;9.)
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During the fiscal year ended June&nbsp;30, 2002, the Company
recognized a loss of $417 relating to the write off of certain
capsule manufacturing equipment that was used by the Company in
its contract manufacturing business. The Company exited the
contract manufacturing business during fiscal 2002 and,
therefore, had no future use for the equipment.
</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;Trade Names and License
Agreements</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;&nbsp;&nbsp;&nbsp;&nbsp;
Trade names and license agreements are carried at cost less
accumulated amortization, which is calculated on a straight-line
basis over the estimated useful life of the asset, which is
generally five&nbsp;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;&nbsp;&nbsp;&nbsp;&nbsp;
Impairment of trade names and license agreements is reviewed
annually or when events and circumstances warrant an earlier
review in accordance with SFAS No.&nbsp;144, <I>Accounting for
the Impairment or Disposal of Long-Lived Assets</I>. Impairment
is determined when estimated future undiscounted cash flows
associated with an intangible asset are less than the
asset&#146;s carrying value. The Company has determined its
intangible assets to have finite lives and, therefore, is
amortizing these assets over their useful lives. If, in the
future, such assets are considered to be impaired, the
impairment recognized will be measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets on a discounted cash flow 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;&nbsp;&nbsp;&nbsp;&nbsp;
During fiscal year 2004, the Company paid $1,250 to enter into a
development and license agreement with Pharmaceuticals Design
L.L.C. (&#147;PD&#148;) for the rights to market respiratory
products in patent-protected packaging configurations. This
asset is being amortized over five years.
</DIV>

<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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;&nbsp;&nbsp;&nbsp;&nbsp;
In December 2004, the Company entered into an agreement with
JMED Pharmaceuticals, Inc. (&#147;JMED&#148;), an affiliate of
PD, for the ability to transfer the AlleRx&#174; license to
Cornerstone Biopharma Inc. (&#147;Cornerstone&#148;). The
Company paid $2,000 in January 2005 for this license, which is
capitalized as a license agreement and will be amortized through
June 2006. For further discussion of this transaction see
Note&nbsp;7.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In April 2004, the Company entered into a royalty-bearing
license agreement with Celltech Pharmaceuticals, Inc. As part of
this agreement, the Company recorded a liability, and a related
other asset of approximately $1,270, which represented the
present value of the minimum amount due under the license
agreement. The other asset will be amortized as additional
royalty expense over the ten-year term of the license agreement.
See Note&nbsp;7 for further discussion of the 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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company wrote off its trade name asset in the amount of $205
in fiscal 2004 in conjunction with its decision to do business
under the name of Adams Respiratory Therapeutics. This expense
is reflected in selling, marketing and administrative expenses
on the statement of operations. The Company recognized no such
write-offs during fiscal 2003, 2002 or the first six months of
fiscal 2005. Amortization expense was $233 and $75 for the
unaudited six months ended December&nbsp;31, 2004 and 2003,
respectively. Amortization expense was $531, $168 and $122 for
fiscal 2004, 2003 and 2002, respectively. The estimated
aggregate amortization expense for the next five years and
thereafter with regard to these trade names and license
agreements is:
</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="89%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Remainder of fiscal year 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>865</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2006</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,730</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2007</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>480</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2008</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>366</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2009</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>266</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2010</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>116</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <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>407</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>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>4,230</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>

</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><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income Taxes</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;&nbsp;&nbsp;&nbsp;&nbsp;
Income taxes are accounted for in accordance with
SFAS&nbsp;No.&nbsp;109, <I>Accounting for Income Taxes</I>.
Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
years in which the differences are expected to reverse. In
assessing the reliability of deferred tax assets, the Company
considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. This
assessment requires significant judgment and estimates. The
ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income during the period
in which those temporary differences become deductible. The
Company considers its history of losses, scheduled reversal of
deferred tax assets and liabilities and projected future taxable
income over the periods in which the deferred tax items are
deductible. Internal Revenue Code Sections&nbsp;382 and 383
contain provisions that may limit the net operating loss
carryforward (&#147;NOL&#148;) available to be used in any given
year upon the occurrence of certain events, including
significant changes in ownership interest.
</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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenue Recognition</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company recognizes product sales when title and risk of loss
have transferred to the customer, when estimated provisions for
product returns, rebates, chargebacks and other sales allowances
are reasonably determinable and when collectibility is
reasonably assured. Accruals for these provisions are presented
in the financial statements as reductions to sales.
</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;Sales Returns and
Allowances</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;&nbsp;&nbsp;&nbsp;&nbsp;
When the Company&#146;s products are sold, the Company reduces
the amount of revenue recognized from such sale by an estimate
of future product returns and other sales allowances. Other
sales allowances include cash discounts, rebates, including
Medicaid rebates, chargebacks, trade promotions and sales
incentives relating to product sold in the current period.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Factors that are considered in the estimates of future product
returns include an estimate of the amount of product in the
trade channel, competitive products, the remaining time to
expiration of the product, and the historical rate of returns.
Consistent with industry practice, the Company maintains a
return policy that allows its customers to return product within
a specified period prior to and subsequent to the expiration
date.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Factors that are considered in the estimates regarding other
sales allowances include historical payment experience in
relationship to revenues, estimated customer inventory levels
and current contract prices and terms with both direct and
indirect customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The provision for chargebacks represents the amount payable in
the future to a wholesaler for the difference between the
invoice price paid to the Company by its wholesale customer for
a particular product and the negotiated contract price that the
wholesaler&#146;s customer pays for that product. The chargeback
estimates take into consideration the current average chargeback
rates by product and estimates wholesaler inventory levels. The
Company continually monitors its assumptions giving
consideration to current pricing trends and estimated wholesaler
inventory levels and makes adjustments to these estimates when
it believes that the actual chargeback amounts payable in the
future will differ from its original estimate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Rebates and sales incentives are recognized as a reduction of
sales at the later of (i)&nbsp;the date at which the related
revenue is recorded or (ii)&nbsp;the date at which the
incentives are offered. Trade promotions include co-operative
advertising arrangements and are recorded as a reduction of
sales when the related revenue is recorded. The Company
estimates the cost of rebates, sales incentives and trade
promotions based on its historical experience with similar
programs. In January 2005, the Company issued coupons for the
Mucinex products. Since the coupon was not offered until January
2005, there was no reserve for the coupons as of
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;&nbsp;&nbsp;&nbsp;&nbsp;
If actual future payments for product returns and other sales
allowances exceed the estimates the Company made at the time of
sale, its financial position, results of operations and cash
flow would be negatively impacted.
</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;Cardinal Health Profit Share
Arrangement</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;&nbsp;&nbsp;&nbsp;&nbsp;
On April&nbsp;1, 2004, the Company sold substantially all of its
manufacturing assets located in Fort&nbsp;Worth, Texas to
Cardinal Health. In connection therewith, the Company entered
into the Supply Agreement with Cardinal Health, whereby Cardinal
Health manufactures substantially all of the
</DIV>

<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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;">
Company&#146;s products. Under the Supply Agreement, Cardinal
Health is required to segregate direct manufacturing costs from
indirect manufacturing costs, as defined therein. As finished
goods are completed and shipped to a Company-designated
warehouse, Cardinal Health bills the Company for the actual
direct manufacturing costs incurred plus a mark-up percentage.
The mark-up percentage is strictly provided for interim billing
purposes and the final amount payable to Cardinal Health is
calculated at the end of each contract year (March&nbsp;31st)
under a profit sharing formula. The amount that is subject to
the profit sharing is calculated as net sales, as defined
therein, less the actual manufacturing cost of the goods sold
during the contract year. The resulting gross profit is subject
to profit sharing rates that decline as the total value of gross
profit increases. At the end of the contract year, a
reconciliation is completed and a billing adjustment is made to
the extent that the actual calculated profit share is greater or
lower than the total mark-up paid to Cardinal Health during the
contract year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The accounting policy with regard to this arrangement is to
record the actual direct manufacturing cost and mark-up billed
by Cardinal Health as inventory. Each month as such product is
sold, the actual direct manufacturing cost plus an estimate of
the profit share amount earned by Cardinal Health is charged to
cost of sales. The estimated profit share amount considers for
each contract year (i)&nbsp;our projected net product sales and
gross profit, (ii)&nbsp;the projected profit share and
(iii)&nbsp;the contractual minimum profit share amount.
</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;Advertising</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;&nbsp;&nbsp;&nbsp;&nbsp;
Costs associated with television and radio advertising are
expensed in the period the advertising airs and are included in
selling, marketing and administrative expenses. The Company
launched a consumer advertising campaign in November 2004.
Advertising expense was $13,497 and $689 for the six months
ended December&nbsp;31, 2004 and 2003, respectively. Advertising
expense was $1,087 and $119 in fiscal years 2004 and 2003,
respectively. Advertising expense was less than $100 in fiscal
year 2002. At December&nbsp;31, 2004, the Company had $8,155 of
prepaid advertising expense relating to advance payments for
commercials that air during the third quarter of fiscal 2005.
</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;Shipping and Handling
Costs</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company classifies shipping and handling costs within its
selling, marketing and administrative expenses. Shipping and
handling costs were $1,461 and $364 for the six months ended
December&nbsp;31, 2004 and 2003, respectively. Shipping and
handling costs were $1,038, $389, and $332 for fiscal 2004, 2003
and 2002, respectively. For periods after April&nbsp;1, 2004,
shipping and handling costs include distribution fees related to
the Cardinal Health distribution services agreement as discussed
in Note&nbsp;9.
</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;Product Development</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;&nbsp;&nbsp;&nbsp;&nbsp;
Our product development expenses have historically consisted of
formulation and analytical development work with existing and
well established drugs and pharmaceutical ingredients, the
development of scale-up and manufacturing data and stability
programs, human pharmacokinetic studies to establish
bioavailability and bioequivalence data for our products versus
reference drugs, as well as the preparation and filing of new
drug applications with the U.S. Food and Drug Administration.
Further, we invest in the prosecution of patents related to our
products and in clinical research studies in support of our
products. Generally, our formulation, chemistry and analytical
manufacturing controls and stability work has been performed
utilizing our own employees and since April&nbsp;2004, in
cooperation with Cardinal Health. Product development expenses
include salary and benefits, raw materials and supplies,
</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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;">
facilities, depreciation, and other allocated expenses
associated with the performance of the above work and functions.
Pharmacokinetic studies, clinical trials and certain support
functions in preparing protocols, reports and other regulatory
documents are performed by scientific consultants and third
party contract research organizations. Product development costs
are expensed as incurred.
</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>Accretion of Preferred Stock</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company adjusts the carrying value of its Series&nbsp;A
redeemable convertible preferred stock (&#147;Series A&#148;)
and its Series&nbsp;B redeemable convertible preferred stock
(&#147;Series B&#148;) and its Series&nbsp;C redeemable
convertible preferred stock (&#147;Series C&#148;) to
liquidation value. Such accretion to liquidation value is
included in the calculation of net income applicable to common
stockholders. For Series&nbsp;A and Series&nbsp;B, the holder
could receive, upon redemption, the fair market value of the
preferred stock. For Series&nbsp;C, the holder could receive,
upon redemption, the fair market value of the preferred stock if
such value exceeds liquidation value. To the extent that the
fair value is greater than the accreted liquidation value at the
balance sheet date, the preferred stock is adjusted to reflect
the fair market value with the offset charged to additional
paid-in capital in stockholders&#146; equity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company incurred approximately $870 and $1,196 of issuance
costs in connection with its issuance of Series&nbsp;A and B,
respectively. Such costs have been recorded as a reduction of
the carrying amount of the preferred stock and are being
accreted through a charge to additional paid-in capital up to
the original redemption date, using the effective interest
method and are included in net income applicable to common
stockholders. There were no issuance costs associated with the
Series&nbsp;C.
</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;Concentration of Credit
Risk</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company sells its products principally to wholesalers and
retailers including mass merchandisers, grocery stores,
membership clubs, and drug stores throughout the United States.
The Company performs ongoing credit evaluations of its
customers&#146; financial condition and generally requires no
collateral from its customers. Prior to the increased sales of
Mucinex products, the Company&#146;s major customers were
primarily major pharmaceutical and healthcare products
wholesalers. Subsequently, the Company reduced its concentration
levels with certain customers and now sells to a combination of
wholesalers, major retailers and mass merchandisers. The table
below outlines the percentage of gross sales made to the
following customers:
</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="60%">&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="1%">&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="1%">&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="1%">&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="6" align="center" nowrap><B>Six Months</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>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&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>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended June&nbsp;30,</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="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>2004</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>
    <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>2002</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">
    Wholesaler&nbsp;&#151; A</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27</TD>
    <TD align="left" valign="bottom" nowrap>%</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">&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">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Wholesaler&nbsp;&#151; B</DIV>
    </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">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18</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</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32</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">
    Wholesaler&nbsp;&#151; C</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27</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</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26</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</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Major retailer&nbsp;&#151; A</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14</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>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>2</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</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">
    Major retailer&nbsp;&#151; B</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12</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</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>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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Major retailer/mass merchandiser</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12</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>7</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>
    <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>

</TABLE>
</CENTER>

<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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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><I>Accounting for Stock-Based Compensation</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company accounts for stock-based compensation in accordance
with the fair value recognition provisions of
SFAS&nbsp;No.&nbsp;123, <I>Accounting for Stock-Based
Compensation</I>, as amended by SFAS&nbsp;No.&nbsp;148,
<I>Accounting for Stock-Based Compensation&nbsp;&#151;
Transition and Disclosure</I> (&#147;SFAS&nbsp;123&#148;), for
stock-based employee compensation.
</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;Earnings/ (Loss) per Common
Share</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;&nbsp;&nbsp;&nbsp;&nbsp;
Basic net earnings/ (loss) per common share
(&#147;Basic&nbsp;EPS&#148;) is computed by dividing net income/
(loss) applicable to common stockholders by the weighted-average
number of common shares outstanding. Diluted net earnings/
(loss) per common share (&#147;Diluted&nbsp;EPS&#148;) is
computed by dividing net income/ (loss) applicable to common
stockholders by the weighted-average number of common shares
outstanding, plus potential dilutive common shares. The
following table sets forth the computation of basic and diluted
earnings per common share:
</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="3%">&nbsp;</TD>
    <TD width="31%">&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="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="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>June&nbsp;30,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&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="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</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>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>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</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>
    <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>Net income/(loss)</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>8,942</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>35,826</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(22,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(15,476</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">
    Accretion of preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,953</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(320</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(590</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(627</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(619</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>
    <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 (loss)/income applicable to common stockholders</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,725</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,622</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35,236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(23,265</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(16,095</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: 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="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Average shares outstanding&nbsp;&#151; basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,761,899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,160,909</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,386,847</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,827,412</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,802,540</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">
    Warrants</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>8,556,336</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,949,178</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock options</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>1,834,255</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,248,227</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 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>
    <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">
    Average shares outstanding&nbsp;&#151; diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,761,899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,551,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24,584,252</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,827,412</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,802,540</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>
    <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="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    (Loss)/earnings per common 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">&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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.64</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.83</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">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1.43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(2.64</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(1.83</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;&nbsp;&nbsp;&nbsp;&nbsp;
The following table shows common share equivalents outstanding
for the period, which are not included in the above historical
calculations, as the effect of their inclusion is anti-dilutive
during each period:
</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="38%">&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="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="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>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>June&nbsp;30,</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="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>2004</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>
    <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>2002</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 C convertible secured notes</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>10,312,180</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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Warrants</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,579,415</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,799,412</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,799,412</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,044,350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,799,412</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock options</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,060,023</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,475,785</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,721,785</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,698,217</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,562,932</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>19,639,438</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,275,197</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,521,197</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,054,747</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,362,344</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>

</TABLE>
</CENTER>

<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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;&nbsp;&nbsp;&nbsp;&nbsp;
Pro forma earnings per common share assumes the conversion of
all redeemable convertible preferred stock into common stock:
</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="3%">&nbsp;</TD>
    <TD width="60%">&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="6%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>June&nbsp;30,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3">&nbsp;</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="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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income, as reported</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>9,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>35,826</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted-average common shares outstanding</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,761,899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,386,847</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">
    Weighted-average common shares outstanding assuming conversion
    of all redeemable convertible preferred stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48,055,162</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>47,992,581</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>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted-average common shares outstanding&nbsp;&#151; basic,
    pro forma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,817,061</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>61,379,428</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>

</TR>

<TR>
    <TD colspan="11">&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">
    Warrants</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,554,105</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,949,178</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 options</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,585,796</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,248,227</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted-average common shares outstanding&nbsp;&#151; diluted,
    pro forma</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>78,956,962</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72,576,833</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>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Pro forma earnings per common 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 valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.58</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">
    Diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.49</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;">
<I>Recently Issued Accounting Pronouncements</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;&nbsp;&nbsp;&nbsp;&nbsp;
In May 2003, the Financial Accounting Standards Board
(&#147;FASB&#148;) issued SFAS&nbsp;No.&nbsp;150, <I>Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity </I>(&#147;SFAS&nbsp;150&#148;).
SFAS&nbsp;150 essentially requires issuers to classify as
liabilities certain types of financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. The Company&#146;s preferred stock is
contingently redeemable at the option of the holder and
therefore is classified outside of stockholders&#146; equity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In January 2003, the FASB issued FASB Interpretation
No.&nbsp;46, <I>Consolidation of Variable Interest Entities</I>
(&#147;FIN&nbsp;46&#148;), which addresses the consolidation of
business enterprises (variable interest entities) to which the
usual condition (ownership of a majority voting interest) of
consolidation does not apply. The interpretation focuses on
financial interests that indicate control. It concludes that in
the absence of clear control through voting interests, a
company&#146;s exposure (variable interest) to the economic
risks and potential rewards from the variable interest
entity&#146;s assets and activities are the best evidence of
control. Variable interests are rights and obligations that
convey economic gains or losses from changes in the values of
the variable interest entity&#146;s assets and liabilities.
Variable interests may arise from financial instruments, service
contracts, nonvoting ownership interests and other arrangements.
If an enterprise holds a majority of the variable interests of
an entity, it would be considered the primary beneficiary. The
primary beneficiary would be required to include the assets,
liabilities and the results of operations of the variable
interest entity in its financial statements. In December 2003,
the FASB issued a revision to FIN&nbsp;46 to address certain
implementation issues. The Company does not have any variable
interest entities, thus the adoption of FIN&nbsp;46 and
FIN&nbsp;46 (revised)&nbsp;had no impact on the Company&#146;s
results of operations, financial position or cash flows.
</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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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>2.</B></TD>
    <TD>
    <B>Benefit 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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company, through a professional employer organization,
provides a 401(k) benefit plan (&#147;the Plan&#148;) covering
substantially all employees. Under the Plan, employees are
eligible to participate in the Plan upon attaining the age of 21
and completing six months of service, and can contribute up to
80% of their compensation each year subject to certain Internal
Revenue Code limitations. The Company did not make any
contributions in fiscal 2004, 2003, or 2002. However, the Board
of Directors approved a match on employee contributions made
during calendar year 2005 contingent upon an established sales
threshold for fiscal year 2005. Since the match is on employee
contributions starting on January&nbsp;1, 2005, the Company did
not record any expense or liability related to this match 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="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>3.</B></TD>
    <TD>
    <B>Convertible Notes&nbsp;Payable</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;&nbsp;&nbsp;&nbsp;&nbsp;
In July and August 2003, the Company issued, for cash, $4,636 of
Series&nbsp;C Convertible Secured Notes (&#147;Series&nbsp;C
Notes&#148;). In May and June 2003, the Company issued, for
cash, $11,286 of Series&nbsp;C Notes. The Series&nbsp;C Notes
were offered to all stockholders of the Company through a rights
offering that concluded in August 2003. Between November 2002
and January 2003, the Company issued, for cash, $5,000 of
Convertible Bridge Notes (&#147;Bridge Notes&#148;). In
connection with the Series&nbsp;C Notes, the Bridge Notes, along
with $213 of accrued interest, were converted into $5,213 of
Series&nbsp;C Notes. In June 2004, all outstanding Series&nbsp;C
Notes and accrued interest were converted into
13,814,937&nbsp;shares of the Series&nbsp;C at a conversion
price of $1.60&nbsp;per share. (See Note&nbsp;4.)
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with the Bridge Notes issued during fiscal year
2003, the Company issued 943,750 warrants to purchase the
Company&#146;s common stock at $0.01&nbsp;per share. In
connection with the Series&nbsp;C Notes, the Company issued
2,897,195 and 10,312,180 warrants in fiscal 2004 and 2003,
respectively, to purchase the Company&#146;s common stock at an
exercise price of $0.01&nbsp;per share.
</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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Emerging Issues Task Force (&#147;EITF&#148;)
No.&nbsp;98-5, <I>Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios</I>, and EITF No.&nbsp;00-27, <I>Application
of Issue&nbsp;98-5 to Certain Convertible Instruments</I>, the
Company is required to value the warrants and beneficial
conversion feature (&#147;BCF&#148;) separately from the notes.
The value assigned to the warrants and BCF is initially recorded
as a discount (debt discount) to the face value of the notes and
an offsetting increase to additional paid-in capital. The debt
discount is amortized to interest expense (a noncash expense)
over the life of the notes under the effective interest method.
The following table provides a reconciliation of the
Series&nbsp;C Notes, Bridge Notes, warrants and BCF, and accrued
interest from their issuance during the fiscal year ended
June&nbsp;30, 2003 until the Series&nbsp;C Notes, in their
entirety, were converted to Series&nbsp;C on June&nbsp;30, 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="50%">&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>
    <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>Series&nbsp;C Notes</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Bridge Notes</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total Notes</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 valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from Notes&nbsp;Issuance in fiscal 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>11,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>5,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>16,286</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued interest on Bridge Notes</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>213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>213</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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Subtotal</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,499</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Reclass&nbsp;Bridge Notes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,213</TD>
    <TD align="left" valign="bottom" nowrap>)</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 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>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross Note balance</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,499</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>16,499</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less value assigned to warrants and BCF</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,888</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,981</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,869</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">
    Amortization of debt discount (interest expense)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>174</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,981</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,155</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">
    Balance of Notes as of June&nbsp;30, 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,785</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>13,785</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">
    Proceeds from Note&nbsp;Issuance in fiscal 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,636</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>4,636</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less value assigned to warrants and BCF</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(811</TD>
    <TD align="left" valign="bottom" nowrap>)</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>(811</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">
    Amortization of debt discount (interest expense)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,406</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>1,406</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">
    Subtotal</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,016</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>19,016</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">
    Accrued interest</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>969</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>969</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unamortized discount</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,119</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>2,119</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">
    Conversion of Notes to Series&nbsp;C</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(22,104</TD>
    <TD align="left" valign="bottom" nowrap>)</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>(22,104</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">
    Ending balance of Notes as of June&nbsp;30, 2004</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 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="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon conversion of Series&nbsp;C Notes to Series&nbsp;C in June
2004, the remaining unamortized debt discount of $2,119
resulting from the value of the warrants and BCF, was recorded
as a reduction to additional paid-in capital. At June&nbsp;30,
2003, the unamortized debt discount associated with the
Series&nbsp;C Notes was $2,714.
</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>4.</B></TD>
    <TD>
    <B>Redeemable Convertible Preferred Stock</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;&nbsp;&nbsp;&nbsp;&nbsp;
In June 2004, the Series&nbsp;C Notes were converted into
13,814,937&nbsp;shares of Series&nbsp;C at a share price of
$1.60. Each share of Series&nbsp;C is entitled to that number of
votes equal to the number of shares of common stock issuable
upon conversion of the Series&nbsp;C.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Holders of Series&nbsp;C are entitled to a liquidation
preference (&#147;Liquidation Value&#148;) that is senior to the
Series&nbsp;A and B&nbsp;Liquidation Values. The Series&nbsp;C
Liquidation Value is equal to 200% of the amount invested in
Series&nbsp;C.
</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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;&nbsp;&nbsp;&nbsp;&nbsp;
The conversion of the outstanding Series&nbsp;C at June&nbsp;30,
2004 would result in the issuance of an additional
13,814,937&nbsp;shares of common stock. The Series&nbsp;C are
convertible by the holders into common stock, at any time, at a
price of $1.60&nbsp;per share subject to adjustment for certain
dilutive events.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Holders of Series&nbsp;C may redeem all, but not less than all,
of their preferred stock at any time during the 90-day period
following June&nbsp;1, 2005 and during the 90-day period
following June&nbsp;1, 2007, provided that a qualified public
offering has not been consummated. A qualified public offering
is defined as a firm commitment underwritten public offering of
shares of the Company&#146;s common stock in which the per share
price is at least $4.00 and the aggregate offering price paid by
the public for the shares is at least $30,000. The redemption
price for the Series&nbsp;C is equal to the greater of
(i)&nbsp;the Series&nbsp;C Liquidation Value or (ii)&nbsp;the
fair market value of the shares redeemed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon any liquidation, dissolution or winding up of the Company,
the holders of Series&nbsp;C are entitled to be paid, before any
distribution or payment is made on any junior security
(including Series&nbsp;A and B, and common stock) an amount
equal to the Series&nbsp;C Liquidation Value. After the
Series&nbsp;C Liquidation Value is paid, the Series&nbsp;A and B
Liquidation Values will be paid to the holders of Series&nbsp;A
and B on a pari-pasu basis, unless such holders convert their
preferred stock to 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;&nbsp;&nbsp;&nbsp;&nbsp;
After all Liquidation Values have been satisfied, the remaining
proceeds from the liquidation, if any, will be distributed in a
general distribution to all stockholders based upon their
proportionate ownership in the Company, including warrants and
options. The holders of Series&nbsp;C will participate in the
general distribution in addition to receiving their Liquidation
Value. The holders of Series&nbsp;A and B will receive, at their
election, either (i)&nbsp;the Series&nbsp;A and B Liquidation
Value, respectively, or (ii)&nbsp;the allocable proceeds from
the general distribution, but not both.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In July 2001, the Company issued 14,218,750&nbsp;shares of
Series&nbsp;B at a purchase price of $1.60&nbsp;per share. In
connection with the Series&nbsp;B financing, the Company issued
warrants to purchase 2,178,125&nbsp;shares of Series&nbsp;B at
an exercise price of $1.60&nbsp;per share. Additionally, during
July 2001, the Company converted $3,057 of convertible notes
payable and accrued interest, then outstanding, into
1,910,447&nbsp;shares of Series&nbsp;B and issued warrants to
purchase&nbsp;477,609&nbsp;shares of Series&nbsp;B at an
exercise price of $1.60&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;&nbsp;&nbsp;&nbsp;&nbsp;
The conversion of the Series&nbsp;A and B outstanding as of
December&nbsp;31, 2004 would result in the issuance of
additional 18,111,028 and 16,129,197&nbsp;shares, respectively,
of common stock. The Series&nbsp;A and B are convertible by the
holders into common stock, at any time, at a price of
$1.45&nbsp;per share and $1.60&nbsp;per share, respectively,
subject to adjustment for certain dilutive events.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Series&nbsp;A and B are redeemable at the option of the
holders, in whole or in part, at any time during the 90-day
period following June&nbsp;1, 2005 and June&nbsp;1, 2007,
provided that a qualified public offering has not occurred. The
redemption price is payable in cash in an amount equal to the
aggregate fair market value of the stock at the time of
redemption plus the aggregate amount of all dividends and
distributions declared and paid with respect to the 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;&nbsp;&nbsp;&nbsp;&nbsp;
So long as there remains outstanding any Series&nbsp;C or any
security convertible into Series&nbsp;C, the Company cannot pay
any portion of the Series&nbsp;A and B redemption value.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon a fundamental change or change in control of the Company,
as defined by the Company&#146;s certificate of incorporation,
the holders of Series&nbsp;A and Series&nbsp;B are entitled to a
Liquidation Value equal to 100% of the amount invested in
respect of such securities. The Liquidation Value of the
Series&nbsp;A and B
</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;">
<B>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;">
is junior to the Series&nbsp;C Liquidation Value. At
December&nbsp;31, 2004, the Liquidation Value payable to
Series&nbsp;C, A and B, before any payments are made to any
other class of security, is 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="63%">&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="6%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Aggregate</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Liquidation</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>Purchase Price</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Value</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">
    Series&nbsp;C</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>22,104</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>44,208</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" 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>26,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26,261</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</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,807</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>&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">$</TD>
    <TD align="right" valign="bottom" nowrap>74,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>96,276</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;&nbsp;&nbsp;&nbsp;&nbsp;
Amounts outstanding for each series of redeemable convertible
preferred stock through 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="61%">&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="4%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Series&nbsp;A</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Series&nbsp;B</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Series&nbsp;C</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">
    Balance at July&nbsp;1, 2001</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>36,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</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 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">
    Issued, net of issuance costs</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>24,612</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">
    Accretion to fair market value</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>7,000</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accretion of issuance costs</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>216</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>403</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at June&nbsp;30, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36,836</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,015</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: 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">
    Accretion to fair market value</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,416</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,415</TD>
    <TD align="left" valign="bottom" nowrap>)</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">
    Accretion of issuance costs</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>219</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>408</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>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at June&nbsp;30, 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,639</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,008</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: 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">
    Issued, net of issuance costs</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>22,104</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accretion to fair market value</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,584</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,585</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36,679</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accretion of issuance costs</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>206</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>384</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>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at June&nbsp;30, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>58,783</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">
    Accretion to fair market value</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>46,183</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>38,710</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,732</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accretion to liquidation value</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>10,953</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">
    Balance at December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>72,444</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>64,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>99,468</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 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>Stockholders&#146; Equity (Deficit)</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;">
<B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock Compensation
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;&nbsp;&nbsp;&nbsp;&nbsp;
Under the terms of the 1999 Long-Term Incentive Plan (the
&#147;1999 Plan&#148;), employees, directors and others
designated by the Board of Directors may be granted awards in
the form of incentive stock options, nonqualified stock options
or restricted 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;&nbsp;&nbsp;&nbsp;&nbsp;
The classes and number of shares to be granted, as well as the
price of each designated class, are determined by the Board of
Directors at the time granted. Options are exercisable upon
grant, either in whole or in part, unless otherwise specified by
the Board of Directors and will remain exercisable until fully
exercised or expiration, whichever occurs first. However,
options granted are subject to a vesting term,
</DIV>

<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;">
<B>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;">
generally over three to five years from the grant date. Under
the 1999 Plan, options are granted for a fixed number of shares
with an exercise price fixed at the date of grant. The exercise
price of the options is equal to the fair value, as determined
by the Board of Directors, of the Company&#146;s stock at the
date of the 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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company accounts for its stock-based compensation in
accordance with the fair value recognition provisions of
SFAS&nbsp;123 for stock-based employee compensation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The fair value for these options was estimated at the date of
grant using the minimum value method with the following
weighted-average 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="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&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="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>June&nbsp;30,</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="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>2004</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>
    <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>2002</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">
    Expected life of the option (in years)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <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>3.4</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.4</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.8</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">
    Volatility</DIV>
    </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>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>0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expected dividend yield</DIV>
    </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>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>0</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">
    Weighted-average fair value of stock options granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.32</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.34</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company recorded stock compensation expense of $179 and $343
for the six months ended December&nbsp;31, 2004 and 2003,
respectively. The Company recorded stock compensation expense of
$686, $880 and $1,292 for the years ended June&nbsp;30, 2004,
2003 and 2002, respectively. Because subjective input
assumptions can materially affect the fair value estimate, in
management&#146;s opinion, the existing methods do not
necessarily provide a reliable single measure of the fair value
of its stock options.
</DIV>

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

<!-- 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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;&nbsp;&nbsp;&nbsp;&nbsp;
A summary of the Company&#146;s stock option activity and
related information is 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="67%">&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>
</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>Weighted-</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>Average</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>Exercise</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>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">
    Options outstanding at June&nbsp;30, 2001</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,304,652</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1.45</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>373,366</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.60</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">
    Canceled</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(111,201</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.45</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <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>(4,883</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.45</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">
    Options outstanding at June&nbsp;30, 2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,561,934</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.46</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>308,463</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.96</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">
    Canceled</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(152,430</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.55</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <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>(23,365</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.45</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">
    Options outstanding at June&nbsp;30, 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,694,602</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.50</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>5,930,938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.25</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">
    Canceled</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(379,341</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.29</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <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>(62,205</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.14</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">
    Options outstanding at June&nbsp;30, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,183,994</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.43</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Granted (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,005,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.73</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">
    Canceled (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(30,098</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.35</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Exercised (unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(99,373</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.14</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">
    Options outstanding at December&nbsp;31, 2004(unaudited)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,060,023</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.56</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;&nbsp;&nbsp;&nbsp;&nbsp;
Effective August 2003, all stock options granted to employees
who were actively employed by the Company were re-priced from
exercise prices between $1.45 and $2.00 down to $0.14. The
weighted-average exercise prices prior to June&nbsp;30, 2003 in
the above table do not reflect the impact of the August 2003
re-pricing.
</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="51%">&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="18%">&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 align="center" nowrap><B>Weighted-Average</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

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

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

<TR style="font-size: 8pt;">
    <TD align="left" nowrap><B>Exercise price</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Contractual Life</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Exercisable</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="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>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    $0.14</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,995,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    6.4</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,402,744</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    $0.50</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,291,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    9.1</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>184,093</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    $0.78</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>295,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    9.3</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</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">
    $1.06</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    9.6</TD>
    <TD>&nbsp;</TD>
    <TD align="right" 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">
    $1.45</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,369,513</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    5.5</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,372,272</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    $1.60</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>69,474</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    7.0</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>67,499</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    $1.76</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>960,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    9.8</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</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">
    $2.00</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>34,520</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    7.7</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>34,520</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <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>&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>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,060,023</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,061,128</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10pt;">F-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="center" style="font-size: 10pt;">
<B>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;">
<B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Warrants</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;&nbsp;&nbsp;&nbsp;&nbsp;
At December&nbsp;31, 2004, the Company has the following
outstanding warrants to purchase stock:
</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="62%">&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="8%">&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="3" align="center" nowrap><B>Outstanding</B></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="3" align="center" nowrap><B>Warrants</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Exercise Price</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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common Stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,871,957</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>0.01</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common Stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,051,724</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1.45</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</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,655,734</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>1.60</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></TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <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>9,579,415</TD>
    <TD>&nbsp;</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></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>6.</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;&nbsp;&nbsp;&nbsp;&nbsp;
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The net deferred tax assets relate primarily to NOLs and sales
reserves. Prior to fiscal 2004, it could not be determined that
it was more likely than not the deferred tax assets would be
realized due to the lack of a history of earnings. As a result,
an offsetting valuation allowance was recorded in the amount of
the entire deferred tax asset balance. NOLs approximated $25,700
at June&nbsp;30, 2004 and will expire between fiscal 2013 and
2018. The Company also had research credits of $1,393 at
June&nbsp;30, 2004, which will expire between fiscal 2005 and
2009. The NOLs and research credits are subject to limitations
under Internal Revenue Code Sections&nbsp;382 and&nbsp;383,
which contain provisions that limit the NOLs and research
credits available to be used in any given year upon the
occurrence of certain events, including significant changes in
ownership interest. During fiscal year 2004, the Company
utilized a portion of its NOLs. Given this utilization, as well
as projections for taxable income for the fiscal year ended
2005, the entire valuation allowance was reversed as of
June&nbsp;30, 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;&nbsp;&nbsp;&nbsp;&nbsp;
The (benefit)/ provision for income taxes 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="3%">&nbsp;</TD>
    <TD width="66%">&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="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 colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center" nowrap><B>June&nbsp;30,</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2002</B></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="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">
    Current provision:</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">
    Federal</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>519</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</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 valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <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>150</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="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred:</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">
    Federal</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(15,014</TD>
    <TD align="left" valign="bottom" nowrap>)</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">
    State</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,779</TD>
    <TD align="left" valign="bottom" nowrap>)</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 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 (benefit)/provision</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(16,124</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</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>
    <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-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="center" style="font-size: 10pt;">
<B>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;&nbsp;&nbsp;&nbsp;&nbsp;
A reconciliation of the (benefit)/ provision based on the
Federal statutory income tax rate to the Company&#146;s
effective income tax rate is 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="70%">&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="4%">&nbsp;</TD>
    <TD width="1%">&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>June&nbsp;30,</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>2004</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>2002</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">
    Provision at Federal statutory rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(35.0</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(35.0</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    State income taxes, net of Federal benefit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5.4</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#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">
    Research credit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(0.7</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(0.9</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2.4</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>(113.8</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35.5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Debt discount</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Incentive stock options</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1.3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <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>0.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.2</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>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Effective tax rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(81.8</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>0</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 align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The significant components of the net deferred tax assets 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="3%">&nbsp;</TD>
    <TD width="69%">&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 colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>June&nbsp;30,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <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 colspan="3">&nbsp;</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>2003</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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred tax assets&nbsp;&#151; current:</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 colspan="2" 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">$</TD>
    <TD align="right" valign="bottom" nowrap>6,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Inventory reserve</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>486</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Litigation reserve</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>790</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">
    Sales reserves</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,585</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" 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>359</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>360</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>

</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">
    Total deferred tax assets&nbsp;&#151; current</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,337</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,221</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>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred tax assets&nbsp;&#151; non-current:</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 colspan="2" 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">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,870</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,383</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred gain on sale of plant assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>649</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research credit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,393</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,188</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    AMT credit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>519</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Nonqualified stock options</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>779</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" 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>126</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>68</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>

</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">
    Total deferred tax assets&nbsp;&#151; non-current</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,456</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,418</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>

</TR>

<TR>
    <TD colspan="3" 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>16,793</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,639</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">
    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>(521</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">
    Valuation allowance</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>(25,118</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" 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">$</TD>
    <TD align="right" valign="bottom" nowrap>16,793</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="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>

</TR>

</TABLE>
</CENTER>

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

<!-- 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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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>7.</B></TD>
    <TD>
    <B>Commitments and Contingencies</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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company has obligations under noncancelable operating leases
for buildings and certain equipment expiring in various years
through August 2014.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Rent expense was $169 and $443 for the six months ended
December&nbsp;31, 2004 and 2003, respectively. Rent expense was
approximately $677, $989 and $1,221 for fiscal 2004, 2003, and
2002, respectively. Future minimum rental commitments 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="89%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Remainder fiscal 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>444</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2006</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>776</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2007</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>514</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2008</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>437</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2009</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>492</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fiscal 2010</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>483</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <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>2,000</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: 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>5,146</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>

</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;&nbsp;&nbsp;&nbsp;&nbsp;
Future rental commitments are primarily for the office building
in Chester, New Jersey, which terminates August 2014.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with the Supply Agreement, the Company is
obligated to pay a minimum profit share to Cardinal Health of
$4,000, $3,000 and $3,000 during the contract years ending
March&nbsp;31, 2005, 2006, and 2007, respectively. As of
December&nbsp;31, 2004, the Company has already paid the minimum
profit share amount to Cardinal Health for the contract year
ending March&nbsp;31, 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;&nbsp;&nbsp;&nbsp;&nbsp;
The Company is a party to various claims and suits arising out
of matters occurring during the normal course of business.
However, as of December&nbsp;31, 2004, there is no current
proceeding or litigation involving the Company that the Company
believes will have a material adverse impact on its business,
financial condition, results of operations or cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On March&nbsp;28, 2003, CellTech Pharmaceuticals, Inc., CellTech
US, Inc. and CellTech Americas, Inc. brought suit against the
Company and certain current and former employees in the United
States District Court for the Western District of New York.
Plaintiffs alleged that the Company (and certain individuals)
misappropriated trade secrets and breached confidentiality
provisions in a manufacturing contract and in the
individual&#146;s past employment contracts with plaintiffs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company agreed to settle the lawsuit on April&nbsp;14, 2004
for the amount of $2,000. Additionally, the Company entered into
a royalty-bearing license agreement whereby the Company will
make monthly payments to Celltech based on a percentage of sales
of certain of the Company&#146;s products. The license agreement
is for a ten-year period commencing December&nbsp;31, 2003.
Payments made under the license agreement are subject to an
annual minimum of $200 and an annual maximum of $500. The
Company recorded a liability, and a related other asset, of
approximately $1,270, which represented the present value of the
minimum amount due under the license agreement of ten annual
payments of $200&nbsp;per year, discounted at 10% per year. The
other asset will be amortized as additional royalty expense over
the ten-year term of the 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;&nbsp;&nbsp;&nbsp;&nbsp;
On May&nbsp;7, 2004 the Company filed a complaint in the
U.S.&nbsp;District Court for the Southern District of New York
against Carolina Pharmaceuticals, Inc. (&#147;Carolina&#148;).
The Company filed an
</DIV>

<P align="center" style="font-size: 10pt;">F-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="center" style="font-size: 10pt;">
<B>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;">
amended complaint on October&nbsp;25, 2004, which added
Cornerstone as a defendant. The amended complaint alleged
trademark, false advertising and unfair competition claims, and
sought damages and injunctive relief. Carolina and Cornerstone
filed counterclaims against the Company, alleging that the
Company&#146;s activities with respect to its single-entity
Mucinex product violate the anti-monopoly provisions of the
federal antitrust laws, that the Company had engaged in false
advertising in violation of federal law with respect to
single-entity Mucinex and the Company&#146;s AlleRx(R) and
Aquatab products, and that the Company had violated state law in
competing with the products of Carolina and Cornerstone. In
February 2005, the Company entered into an agreement with
Cornerstone in which it received the Humibid trademarks from
Cornerstone and Cornerstone received the AlleRx&#174; trademarks
from the Company. Additionally, the parties released each other
from all claims and damages in the lawsuit. As part of this
arrangement, the Company is contractually obligated to assume
the financial responsibility for the first $1,000 of returned
AlleRx(R) product, which was sold by the Company prior to
February&nbsp;15, 2005 and returned to Cornerstone during the
18-month period beginning February&nbsp;15, 2005. Conversely,
Cornerstone is financially responsible for the first $1,000 of
Humibid product returns for the same 18&nbsp;month period. After
the $1,000 threshold is met, the Company will have the
responsibility for all Humibid product returns whether sold by
the Company or Cornerstone and Cornerstone will bear the same
liability for AlleRx(R) products. In connection with this
agreement, the Company is obligated to pay Cornerstone a royalty
ranging from 1% to 2% of net Humibid sales for a period of
three&nbsp;years after February&nbsp;15, 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;&nbsp;&nbsp;&nbsp;&nbsp;
In March 2004, the Company entered into a development and
license agreement with PD, an affiliate of JMED, in which the
Company licensed certain intellectual property to commercialize
certain respiratory products. Pursuant to the agreement, the
Company paid PD $1,250. Under this agreement, upon a change of
control, which includes a public offering, PD has the right to
exchange the appraised fair market value of all of its economic
interest (i.e., on-going royalty interest) in the licensed
products into shares of the Company&#146;s common stock
(&#147;Exchange Rights&#148;). The agreement imposes certain
requirements on the parties, but these requirements have been
suspended by an amendment to this agreement. Under the
amendment, the Company has until August&nbsp;31, 2005 to
determine if the Company wishes to go forward with the
agreement. If the Company decides not to go forward, the Company
has agreed to pay PD $500 and the agreement will terminate
(&#147;Termination Fee&#148;). In the event the Company
undergoes a public offering prior to the time the Company has
made an election not to go forward, the Company has agreed to
grant PD $500 worth of common stock, valued at the public
offering price, as an advance against either the Exchange
Rights, or the Termination Fee. After such an offering, the
Company still has the option until August&nbsp;31, 2005 of going
forward with the products. If the Company does go forward with
the agreement, the parties have agreed to negotiate in good
faith to modify certain terms of the agreement and PD retains
Exchange Rights until the time of such 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;&nbsp;&nbsp;&nbsp;&nbsp;
In December 2004, the Company entered into an agreement with
JMED for the ability to transfer the AlleRx&#174; license
agreement to Cornerstone and the Company paid JMED $2,000 in
January 2005. In connection with the PD&nbsp;License agreement,
JMED was granted the right to convert its on-going royalty
interest in the AlleRx(R) product to the Company&#146;s common
stock in the event of a public offering or change of control.
The assignment of the JMED agreement to Cornerstone provided
that JMED had the right to exchange its royalty interest for the
Company&#146;s common stock, as outlined under the PD license
agreement. The valuation of the on-going royalty will be
performed by an outside appraisal firm prior to March&nbsp;31,
2005. To the extent that the final appraisal exceeds the $2,000
previously paid, JMED will have the right to convert such excess
into the Company&#146;s common stock at the price per share in
the public offering. Upon conversion of JMED&#146;s royalty
interest into the Company&#146;s common stock, the Company will
become the recipient of future royalties earned under the
license agreement. If JMED does not elect
</DIV>

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

<!-- 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>Adams Laboratories, 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;&nbsp;(Continued)</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands, except per share amounts)</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 pertaining to December&nbsp;31, 2004 and for
the</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>six months ended December&nbsp;31, 2004 and 2003 is
unaudited)</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;">
to convert the excess royalty interest into the Company&#146;s
common stock, JMED will continue to collect royalties under the
license agreement and the Company will be paid 40% of such
royalties up to a maximum of $1,000. The Company has agreed to
guarantee the royalty payments due to JMED from Cornerstone
through the date of a change of control or public offering.
</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>8.</B></TD>
    <TD>
    <B>Working Capital and Equipment Loans</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;&nbsp;&nbsp;&nbsp;&nbsp;
In March 2002, the Company entered into a Loan and Security
Agreement with Silicon Valley Bank to provide a revolving line
of credit and equipment advances not to exceed $3,500 and
$1,000, respectively. Effective December 2003, the line of
credit was increased to $5,000 and expired in December 2004. As
of December&nbsp;31, 2004, the Company had no outstanding
obligations under the working capital or the equipment advance
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="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>9.</B></TD>
    <TD>
    <B>Sale of Manufacturing Operation</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;&nbsp;&nbsp;&nbsp;&nbsp;
On April&nbsp;1, 2004, pursuant to an Asset Purchase Agreement,
the Company sold substantially all of its net manufacturing
assets to Cardinal Health for approximately $5,580, which
exceeded the Company&#146;s carrying value of such assets sold.
A deferred gain of approximately $1,690 was recorded in fiscal
2004 in connection with this transaction. The deferred gain will
be amortized as a reduction of cost of sales over the term of
the supply agreement. As of December&nbsp;31, 2004, the deferred
gain on sale of the manufacturing plant was $1,563. In
connection therewith, the Company and Cardinal Health entered
into the Supply Agreement, whereby Cardinal Health will operate
as the exclusive manufacturer of the Company&#146;s products,
including Mucinex. Adams will continue to own its products and
all intellectual property related thereto. Additionally, on
April&nbsp;1, 2004, the Company entered into a distribution
services agreement with a separate Cardinal Health entity,
whereby Cardinal Health will act as the Company&#146;s exclusive
distributor of all the Company&#146;s products.
</DIV>

<P align="center" style="font-size: 10pt;">F-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; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Schedule&nbsp;II</B>
</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>Adams Laboratories</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>Valuation and Qualifying Accounts</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<B>($ in thousands)</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;">
Valuation and qualifying accounts deducted from assets to which
they apply:
</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="45%">&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="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Allowance for accounts receivable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</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>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

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

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>for Doubtful</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>for Cash</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>for Trade</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Allowance for</B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Accounts</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Discounts</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Promotions</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Deferred Tax Assets</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 valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended June&nbsp;30, 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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at the beginning of the year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>65</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>25</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>11,270</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Additions: Charged to costs and expenses(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>39</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>282</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>6,121</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deductions from reserves</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(67</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(298</TD>
    <TD align="left" valign="bottom" nowrap>)</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at the end of period</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</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>17,391</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>

</TR>

<TR>
    <TD colspan="17">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended June&nbsp;30, 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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at the beginning of the year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</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>17,391</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Additions: Charged to costs and expenses(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>385</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>7,727</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deductions from reserves</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(11</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(345</TD>
    <TD align="left" valign="bottom" nowrap>)</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at the end of period</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49</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>25,118</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>

</TR>

<TR>
    <TD colspan="17">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For the year ended June&nbsp;30, 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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at the beginning of the year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49</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>25,118</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Additions: Charged to costs and expenses(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>182</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,526</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,155</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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deductions from reserves</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(14</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,432</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(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>(25,118</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>
    <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">
    Balance at the end of period</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>203</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>988</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: 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="17">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    For six months ended December&nbsp;31, 2004 (unaudited):</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">
    Balance at the beginning of the year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>203</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>988</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">
    Additions: Charged to costs and expenses(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>31</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,960</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 align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deductions from reserves</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(33</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,107</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,257</TD>
    <TD align="left" valign="bottom" nowrap>)</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>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at the end of period</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>505</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&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: 8pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
(1)&nbsp;Charges related to cash discounts and trade promotions
are reflected as reductions of sales to customers.
</DIV>

<P align="center" style="font-size: 10pt;">F-28
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<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="center" style="font-size: 10pt"><IMG src="y06044y0604499.jpg" alt="()">


<TABLE width="90%">
<TR><TD style="font-size: 1pt; color: #FFFFFF">EXCESS MUCUS
<B>DOESN&#146;T LIVE HERE</B>
ANYMORE.
THE FIRST 12-HOUR TABLET TO TREAT RESPIRATORY CONGESTION: MUCINEX<SUP style="font-size: 85%; vertical-align: text-top">&#174;1,2 </SUP>
<B>THE ONLY 600 mg formulation to maintain the therapeutic effectiveness of guaifenesin over 12 hours</B><SUP style="font-size: 85%; vertical-align: text-top">1-3</SUP>
<B>THE ONLY immediate/extended release to maximize consistent delivery with no peaks and troughs</B><SUP style="font-size: 85%; vertical-align: text-top">1-3</SUP>
<B>THE ONLY BID bi-layer tablet to enhance patient compliance</B><SUP style="font-size: 85%; vertical-align: text-top">1-3</SUP>
<I>For respiratory congestion...</I>
<B>References: 1. </B>Mucinex product labeling. <B>2. </B>Orange Book data. Available at:
http://www.accessdata.fda.gov/scripts/cder/ob/docs/tempai.cfm. Accessed October&nbsp;29, 2004.
<B>3.</B>Dataon file, Adams Respiratory Therapeutics, Chester, NJ.
MUCINEX<SUP style="font-size: 85%; vertical-align: text-top">&#174; </SUP>I N
<B>MUCUSOUT</B>
&#169;2004 Adams Laboratories, Inc, Chester, NJ 07930 112204 US Pat. 6,372,252 B1</TD>
</TR>
</TABLE>




<P align="center" style="font-size: 10pt">&nbsp;
</DIV>


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<DIV align="left" style="font-size: 10pt;">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Through
and
including &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This 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.</B>
</DIV>

<DIV align="center" style="font-size: 16pt; margin-top: 3pt; 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;Shares</B>
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>Common Stock</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<IMG src="y06044y0604403.gif" alt="(Adams Laboratories Logo)">
</DIV>

<DIV align="center" style="font-size: 14pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<B>ADAMS LABORATORIES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 3pt; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">
<DIV style="width: 27%; 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>PROSPECTUS</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: 27%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005</B>
</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>PART&nbsp;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;&nbsp;&nbsp;&nbsp;&nbsp;
Estimated expenses payable in connection with the sale of the
common stock in this offering 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="86%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    SEC registration fee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>14,713</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    NASD filing fee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Nasdaq National Market listing fee</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 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>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD 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>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounting fees 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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD 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>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Blue Sky fees 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>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Miscellaneous</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>&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">
    Total</DIV>
    </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>&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;&nbsp;&nbsp;&nbsp;&nbsp;
We will bear all of the expenses shown above.
</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;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;&nbsp;&nbsp;&nbsp;&nbsp;
The Delaware General Corporation Law and our certificate of
incorporation and bylaws provide for indemnification of our
directors and officers for liabilities and expenses that they
may incur in such capacities. In general, directors and officers
are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, our the
best interests, and with respect to any criminal action or
proceeding, actions that the indemnitee had no reasonable cause
to believe were unlawful. Please see our certificate of
incorporation, which is filed as Exhibit&nbsp;3.1 hereto and our
bylaws, which are filed as Exhibit&nbsp;3.2 hereto.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into indemnification agreements with our
officers and directors, a form of which is attached as Exhibit
10.19 hereto and incorporated herein by reference. The
Indemnification Agreements provide our officers and directors
with further indemnification to the maximum extent permitted by
the Delaware General Corporation Law. The purchase agreement
filed as Exhibit&nbsp;1.1 hereto provides that the underwriters
are obligated, under certain circumstances, to indemnify our
directors, officers and controlling persons against certain
liabilities, including liabilities under the Securities Act.
Please see the form of purchase agreement filed as
Exhibit&nbsp;1.1 hereto.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We currently maintain a directors&#146; and officers&#146;
liability insurance policy.
</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;&nbsp;&nbsp;&nbsp;&nbsp;
Set forth below is information regarding shares of common stock
and preferred stock issued, and options and warrants granted, by
us within the past three years. Also included is the
consideration, if any, received by us for such shares, options
and warrants and information relating to the section of the
Securities Act, or rule of the Securities and Exchange
Commission, under which we claimed an exemption from
registration.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(a)&nbsp;<I>Issuances of Capital Stock</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;&nbsp;&nbsp;&nbsp;&nbsp;
In January 2003, upon the exercise of warrants, we issued an
aggregate of 4,714&nbsp;shares of common stock at a price per
share of $0.01 to individual investors.
</DIV>

<P align="center" style="font-size: 10pt;">II-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;&nbsp;&nbsp;&nbsp;&nbsp;
In May 2003, upon the exercise of warrants, we issued an
aggregate of 8,257&nbsp;shares of common stock at a price per
share of $0.01 to an individual investor.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In September 2003, upon the exercise of warrants, we issued an
aggregate of 4,978,827&nbsp;shares of common stock at a price
per share of $0.01 to an institutional investor.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In February 2004, upon the exercise of warrants, we issued an
aggregate of 896,674&nbsp;shares of common stock at a price per
share of $0.01 to institutional investors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In May 2004, upon the exercise of warrants, we issued an
aggregate of 9,878&nbsp;shares of common stock at a price per
share of $0.01 to an individual investor.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In June, July and August 2004, upon the exercise of warrants, we
issued an aggregate of 1,623,055&nbsp;shares of common stock at
a price per share of $0.01 to individual investors and
institutional investors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In October 2004, upon the exercise of warrants, we issued an
aggregate of 91,953&nbsp;shares of common stock at a price per
share of $1.45 to an individual investor.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In October and November 2004, upon the exercise of warrants, we
issued an aggregate of 759,764&nbsp;shares of common stock at a
price per share of $0.01 to institutional investors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In February 2005, upon the exercise of warrants, we issued an
aggregate of 17,444&nbsp;shares of common stock at a price per
share of $0.01 to individual investors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the last three years, we have issued 221,549&nbsp;shares of
common stock upon the exercise of stock options with a weighted
average exercise price of $0.31 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;&nbsp;&nbsp;&nbsp;&nbsp;
(b)&nbsp;<I>Issuances of Series&nbsp;C Preferred Stock</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;&nbsp;&nbsp;&nbsp;&nbsp;
Between May and August 2003, we issued an aggregate of
$21,134,998 in 8% Convertible Notes, which are convertible into
Series&nbsp;C Preferred Stock, together with warrants to
purchase an aggregate of 13,209,374&nbsp;shares of common stock
at an exercise price of $0.01&nbsp;per share to individual and
institutional investors, including PSBF, Tullis-Dickerson, EGI,
and Merrill Lynch. In June 2004, we issued an aggregate
13,814,937&nbsp;shares of Series&nbsp;C Preferred Stock at a
price per share of $1.60 to individual and institutional
investors, upon the conversion of the convertible secured
promissory notes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(c)&nbsp;<I>Stock Option Grants</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;&nbsp;&nbsp;&nbsp;&nbsp;
Between March&nbsp;1, 2002 and February&nbsp;28, 2005, we had
issued to employees, directors and consultants
7,704,996&nbsp;shares of common stock upon the exercise of stock
options at a weighted average exercise price of $0.63&nbsp;per
share and no options to purchase shares of common stock were
outstanding outside our 1999 Long-Term Incentive Plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The issuance of stock options and the common stock issuable upon
the exercise of such options as described in this
paragraph&nbsp;(c)&nbsp;of Item&nbsp;15 were issued pursuant to
written compensatory plans or arrangements with our&#146;
employees, directors and consultants, in reliance on the
exemption provided by Rule&nbsp;701 promulgated under the
Securities Act. All recipients either received adequate
information about us or had access, through employment or other
relationships, to such information.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
All of the foregoing securities are deemed restricted securities
for purposes of the Securities Act. All certificates
representing the issued shares of common stock described in this
Item&nbsp;15 included appropriate legends setting forth that the
securities had not been registered and the applicable
restrictions on transfer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(d)&nbsp;<I>Warrants</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;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to the warrants discussed above, in November and
December of 2002 and January 2003, we issued warrants to
purchase an aggregate of 943,750&nbsp;shares of common stock at
an exercise price of $0.01&nbsp;per share to individual and
institutional investors, including EGI, Merrill Lynch, MJG
Partners, PSBF, Tullis-Dickerson, and Talon.
</DIV>

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

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<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;&nbsp;&nbsp;&nbsp;&nbsp;
No underwriters were involved in the foregoing sales of
securities. The securities described in this paragraphs
(a)&nbsp;and (b) of Item&nbsp;15 were issued to a combination of
foreign and U.S.&nbsp;investors in reliance upon the exemption
from the registration requirements of the Securities Act, as set
forth in Section&nbsp;4(2) under the Securities Act and
Rule&nbsp;506 of Regulation&nbsp;D promulgated thereunder
relative to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was
required. All purchasers of shares of our common 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.
</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;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;&nbsp;&nbsp;&nbsp;&nbsp;
(a)&nbsp;<I>Exhibits: The list of exhibits is set forth in
beginning on page&nbsp;II-6 of this Registration Statement and
is incorporated herein by reference.</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;&nbsp;&nbsp;&nbsp;&nbsp;
(b)&nbsp;<I>Financial Statements Schedules:</I> n/a
</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;&nbsp;&nbsp;&nbsp;&nbsp;
*(f) We hereby undertake 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;&nbsp;&nbsp;&nbsp;&nbsp;
*(h) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of us pursuant to the foregoing
provisions, or otherwise, we have 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 us of expenses incurred or paid by a director, officer or
controlling person of us 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, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by us 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;&nbsp;&nbsp;&nbsp;&nbsp;
*(i) We hereby undertake 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="6%"></TD>
    <TD width="7%"></TD>
    <TD width="87%"></TD>
</TR>

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

<DIV align="left" style="font-size: 3pt; margin-top: 15pt; 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="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>*&nbsp;</TD>
    <TD align="left">
    Paragraph references correspond to those of Regulation&nbsp;S-K,
    Item&nbsp;512.</TD>
</TR>

</TABLE>

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

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<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;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Registration
Statement on Form&nbsp;S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Chester, New Jersey
on March&nbsp;25, 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">
    <FONT style="font-variant:SMALL-CAPS">Adams Laboratories, Inc.
    </FONT></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="1%"></TD>
    <TD width="59%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center">
    /s/ <FONT style="font-variant:SMALL-CAPS">Michael J. Valentino
    </FONT></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 3pt;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

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

<TR valign="top"  style="font-size: 10pt;">
    <TD>&nbsp;</TD>
    <TD align="left">
    By:&nbsp;Michael J. Valentino</TD>
</TR>

<TR valign="top"  style="font-size: 10pt;">
    <TD>&nbsp;</TD>
    <TD align="left">
    Its:&nbsp;Chief Executive Officer,</TD>
</TR>

<TR valign="top"  style="font-size: 10pt;">
    <TD>&nbsp;</TD>
    <TD align="left">
    President and Director</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>ADAMS LABORATORIES, INC.</B>
</DIV>

<DIV align="center" style="font-size: 10pt;">
<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;&nbsp;&nbsp;&nbsp;&nbsp;
We, the undersigned directors and officers of Adams
Laboratories, Inc. (&#147;Adams&#148;) do hereby constitute and
appoint Michael J. Valentino, David Becker and Walter Riehemann,
and each of them, our true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for
us and in our name, place and stead, in any and all capacities,
to sign any and all amendments including post effective
amendments to the Registration Statement filed on Form S-1
relating to the initial public offering of common stock of Adams
including any registration statement filed pursuant to Rule
462(b) under the Securities Act and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, and we do hereby
ratify and confirm all that said attorneys-in-fact and agents,
or their substitutes, may lawfully do or cause to be done by
virtue hereof.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the requirements of the Securities Act of 1933, as
amended, 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="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Name</B></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 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>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&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">Michael J.
    Valentino<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Michael
    J. Valentino</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Chief Executive Officer and Director (principal executive
    officer)</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March 25, 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 P. Becker<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>David
    P. Becker</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Chief Financial Officer (principal financial and accounting
    officer)</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March 25, 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 Q.
    Adams,&nbsp;Sr.<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>John
    Q. Adams,&nbsp;Sr.</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March 25, 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">Steven A. Elms<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Steven
    A. Elms</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March 25, 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">Joan P. Neuscheler<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Joan
    P. Neuscheler</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March 25, 2005</TD>
</TR>

</TABLE>
</CENTER>

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

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<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="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
</TR>


<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Name</B></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 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>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&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">Donald J.
    Liebentritt<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Donald
    J. Liebentritt</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March 25, 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">Harold F. Oberkfell<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Harold
    F. Oberkfell</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March 25, 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">William C. Pate<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>William
    C. Pate</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March 25, 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">Andrew N.
    Schiff,&nbsp;M.D.<BR>
    <DIV style="border-top: 1pt solid #000000; font-size: 1pt; margin-top: 2pt;">&nbsp;</DIV></FONT>Andrew
    N. Schiff,&nbsp;M.D.</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    March 25, 2005</TD>
</TR>

</TABLE>
</CENTER>

<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>EXHIBIT INDEX</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="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="81%">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="center" nowrap><B>Exhibit</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</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>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Description</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>&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="right" valign="top">
    &#151;</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Certificate of Incorporation of Adams Laboratories, Inc.*</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Bylaws of Adams Laboratories, Inc.*</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Specimen Stock Certificate of Adams Laboratories, Inc.&#146;s
    Common Stock, par value $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per share*</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Reference is made to Exhibits&nbsp;3.1 and 3.2</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amended and Restated Registration Rights Agreement, dated
    July&nbsp;9, 2001, by and between Adams Laboratories, Inc. and
    certain stockholders</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Series&nbsp;C Preferred Stock Registration Rights Agreement,
    dated May&nbsp;19, 2003, between Adams Laboratories, Inc. and
    Tullis-Dickerson Capital Focus III, L.P., TD Origen Capital
    Fund, L.P., TD Lighthouse Capital Fund, L.P., EGI-Fund (02-04)
    Investors, LLC and Perseus-Soros Biopharmaceutical Fund, LP.</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Opinion of Alston&nbsp;&#38; Bird 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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement dated April&nbsp;1, 2004 between Adams
    Laboratories, Inc. and William J. Adams,&nbsp;Jr. for Adams
    Laboratories, Inc.&#146;s office in Chester, New Jersey.</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&#134;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Asset Purchase Agreement dated March&nbsp;24, 2004 between Adams
    Laboratories, Inc. and Cardinal Health PTS, LLC</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&#134;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Exclusive Distribution Agreement dated April&nbsp;1, 2004
    between Adams Laboratories, Inc. and Cardinal Health PTS, LLC</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&#134;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Supply Agreement dated April&nbsp;1, 2004 between Cardinal
    Health PTS, LLC and Adams Laboratories, Inc.</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Commercial Services Agreement dated April&nbsp;1, 2004 between
    Cardinal Health PTS, LLC and Adams Laboratories, Inc.</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    1999 Long-Term 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>.7</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Award under the 1999 Long-Term 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>.8</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Director Compensation 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>.9</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Award under Director Compensation 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>.10</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Adams Laboratories, Inc. Retirement Savings 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>.11</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Employment Agreement with Michael J. Valentino dated
    August&nbsp;7, 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>.12</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Income Security Agreement with David P. Becker dated
    September&nbsp;22, 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>.13</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Income Security Agreement with John Thievon dated
    September&nbsp;22, 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>.14</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Income Security Agreement with Robert Casale dated
    September&nbsp;22, 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>.15</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Income Security Agreement with Walter E. Riehemann dated
    September&nbsp;22, 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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Income Security Agreement with Helmut H. Albrecht dated
    October&nbsp;1, 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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Income Security Agreement with Susan Witham dated
    October&nbsp;4, 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>.18</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Indemnity Agreement between Adams Laboratories, Inc. and
    Directors and Certain Officers*</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="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Consent of Alston&nbsp;&#38; Bird LLP (Included in
    Exhibit&nbsp;5.1)</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="right" valign="top">
    &#151;</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>24</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">
    &#151;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Power of Attorney (included in Part&nbsp;II of this registration
    statement)</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: 15%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</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;To be filed by amendment.
</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="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD>&#134;&nbsp;</TD>
    <TD align="left">
    Portions of the exhibit have been omitted pursuant to a request
    for confidential treatment. The confidential portions have been
    filed with the SEC.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;">II-6
</BODY>
</HTML>
[{"type": "S-1", "sequence": "1", "filename": "y06044sv1.htm", "description": "ADAMS LABORATORIES, INC.", "secsgml_size_bytes": 1334994}]
{"company-data": {"conformed-name": "Adams Laboratories, Inc.", "cik": "0001319439", "irs-number": "752725552", "state-of-incorporation": "TX", "fiscal-year-end": "0630"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-123585", "film-number": "05704206"}, "business-address": {"street1": "425 MAIN STREET", "city": "CHESTER", "state": "NJ", "zip": "07930", "phone": "(908) 879-1400"}, "mail-address": {"street1": "425 MAIN STREET", "city": "CHESTER", "state": "NJ", "zip": "07930"}, "former-company": {"former-conformed-name": "Adams Respiratory Therapeutics, Inc.", "date-changed": "20050301"}}
FORM S-1
Table of Contents
As filed with the Securities and Exchange Commission on
March 25, 2005.
Registration
No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ADAMS LABORATORIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Texas
(State or Other Jurisdiction of
Incorporation or Organization)
2834
(Primary Standard Industrial
Classification Code Number)
75-2725552
(I.R.S. Employer
Identification Number)
425 Main Street
Chester, New Jersey 07930
(908) 879-1400
(Address, including zip code, and telephone number,
including
area code, of registrant's principal executive
offices)
Walter E. Riehemann, Esq.
Vice President & General Counsel
425 Main Street
Chester, New Jersey 07930
(908) 879-1400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of Communications to:
J. Vaughan Curtis
J. Mark Ray
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
(404) 881-7000
Patrick O'Brien
Ropes & Gray LLP
One International Place
Boston, Massachusetts 02110
(617) 951-7000
Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the effective date of
this registration statement.
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, as amended,
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,
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
Aggregate Offering
Amount of
Title of Each Class of Securities to be Registered
Price(1)
Registration Fee(1)
Common Stock, $0.01 par value per share
$125,000,000
$14,713
(1)
Estimated pursuant to Rule 457(o) of the Securities Act of
    1933, as amended, solely for purposes of calculating the
    registration fee.
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 of 1933 or until this 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. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not
permitted.
PROSPECTUS
(Subject to
Completion)
Issued                     ,
2005
Shares
ADAMS LABORATORIES, INC.
Common Stock
This offering is our initial public offering of shares of our
common stock. We are
offering                      shares
of common stock and the selling stockholders are
offering                      shares
of common stock. We will not receive any of the proceeds from
the sale of shares of common stock by the selling stockholders.
We expect the initial public offering price to be between
$          and
$          per
share. Currently, no public market exists for our shares. We
intend to apply to have our common stock quoted on the Nasdaq
National Market under the symbol "ARxT".
Investing in our common stock involves risks. See "Risk
Factors" beginning on page 7.
Per Share
Total
Public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to us
$
$
Proceeds, before expenses, to the selling stockholders
$
$
The underwriters may also purchase up to an
additional                      shares
of common stock from us at the public offering price, less the
underwriting discount, within 30 days from the date of this
prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares to purchasers on
or
about                    ,
2005.
Merrill Lynch & Co.
Morgan Stanley
Deutsche Bank Securities
RBC Capital Markets
,
2005.
Table of Contents
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TABLE OF CONTENTS
Page
Prospectus Summary
1
Risk Factors
7
Cautionary Note Regarding Forward-Looking
    Statements
22
Use of Proceeds
23
Dividend Policy
23
Capitalization
24
Dilution
25
Selected Financial Data
27
Management's Discussion and Analysis
    of Financial Condition and Results of Operations
29
Market, Ranking and Other Data
42
Business
43
Management and Board of Directors
58
Principal and Selling Stockholders
70
Certain Relationships and Related Party
    Transactions
73
Description of Capital Stock
75
Shares Eligible for Future Sale
80
Federal Income Tax Consequences to
    Non-U.S. Holders of Common Stock
83
Underwriting
86
Legal Matters
89
Experts
89
Where You Can Find More Information
89
Index to Financial Statements
F-1
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
SERIES C PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT
LEASE AGREEMENT
ASSET PURCHASE AGREEMENT
EXCLUSIVE DISTRIBUTION AGREEMENT
SUPPLY AGREEMENT
COMMERCIAL SERVICES AGREEMENT
1999 LONG-TERM INCENTIVE PLAN
FORM OF AWARD
RETIREMENT SAVINGS PLAN
EMPLOYMENT AGREEMENT WITH MICHAEL J. VALENTINO
INCOME SECURITY AGREEMENT WITH DAVID P. BECKER
INCOME SECURITY AGREEMENT WITH JOHN THIEVON
INCOME SECURITY AGREEMENT WITH ROBERT CASALE
INCOME SECURITY AGREEMENT WITH WALTER E. RIEHEMANN
INCOME SECURITY AGREEMENT WITH HELMUT H. ALBRECHT
INCOME SECURITY AGREEMENT WITH SUSAN WITHAM
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
information different from that contained in this prospectus.
This prospectus may be used only where it is legal to sell these
securities. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the
front of this prospectus.
For investors outside the United States: Neither we nor any of
the underwriters have done anything that would permit this
offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States. You are required to inform yourselves
about and to observe any restrictions relating to this offering
and the distribution of this prospectus.
Table of Contents
PROSPECTUS SUMMARY
The following is a summary of selected information contained
elsewhere in this prospectus. It does not contain all of the
information that you should consider before buying shares of our
common stock. You should read this entire prospectus carefully,
especially the section entitled "Risk Factors" and the
financial statements and the notes to the financial statements
at the end of the prospectus. References in this prospectus to
"we," "us," "our" or the
"Company," unless the context requires otherwise,
refer to Adams Laboratories, Inc.
Adams Laboratories, Inc.
Our Business
We are a specialty pharmaceutical company focused on the
late-stage development,
commercialization and marketing of over-the-counter, or OTC,
and prescription pharmaceuticals for the treatment of
respiratory disorders. We currently market two OTC products
under our Mucinex brand and expect to launch four additional
products that are already approved by the U.S. Food and
Drug Administration, or the FDA, over the next two years.
For the fiscal year ended June 30, 2004, our revenues were
$61.3 million and our net income was $35.8 million
(including a tax benefit of $16.1 million related primarily
to the future benefit of our net operating loss), representing a
337% growth in revenues over the fiscal year ended June 30,
2003. For the six months ended December 31, 2004, our
revenues were $62.0 million and our net income was
$9.2 million, representing a 129% increase in revenues over
the six months ended December 31, 2003.
Mucinex, our single-ingredient product that we refer to as
Mucinex SE, is the only FDA-approved, long-acting,
single-ingredient guaifenesin product in the United States.
Guaifenesin is an expectorant that thins bronchial secretions
and makes coughs more productive. In accordance with FDA policy
to remove unapproved products from the market once a similar
product has been approved, all competitive long-acting,
single-ingredient guaifenesin products were removed from the
market in December 2003. Based on data from IMS Health
Incorporated-National Prescription Audit Plus Family of
Services
TM
,
or IMS
Health-NPA
TM
,
we estimate that, for the 12 months ended June 30,
2003, approximately 10.5 million prescriptions were
dispensed for competing long-acting, single-ingredient
guaifenesin products. Mucinex SE is now the only product
available to meet this demand.
Mucinex DM, introduced in August 2004, is the only FDA-approved,
long-acting guaifenesin and dextromethorphan HBr (a cough
suppressant) combination product in the United States. Based on
IMS
Health-NPA
TM
data, we estimate that, for the 12 months ended
June 30, 2003, approximately 3.0 million prescriptions
were dispensed for long-acting guaifenesin and dextromethorphan
combination products in the United States. If the FDA removes
competitive products from the market under its policy, Mucinex
DM will be the only product available to meet this demand.
Our four additional FDA-approved products, which we have not yet
launched, are Mucinex D, which combines long-acting guaifenesin
with the decongestant pseudoephedrine HCl, and three maximum
strength guaifenesin-based products. Each of these products is
the only FDA-approved product of its kind. We expect to launch
Mucinex D and our maximum strength, single-ingredient
guaifenesin product (under the Humibid brand name) in the first
quarter of 2006 and our remaining maximum strength formulations
in the second half of 2006.
All of our products incorporate our patented delivery system for
guaifenesin. Our delivery system has an immediate release
component that provides rapid relief from excess mucus and an
extended-release component that provides a long-lasting effect
for up to 12 hours. Utilizing this technology, we are
currently developing three additional products combining
long-acting guaifenesin with other active ingredients.
The U.S. retail market for OTC cough, cold, allergy, and sinus
products is approximately $2.6 billion according to
Information Resources, Inc., or IRI, for the 52 weeks ended
January 23, 2005.
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Table of Contents
The U.S. market for prescription cough and cold products
was approximately $1.3 billion in 2004 according to
IMS Health Incorporated–National Sales
Perspectives
TM
,
or IMS Health–National Sales
Perspectives
TM
.
We believe that our current products and products in development
or being considered for development will compete in many of the
segments included in this combined OTC and prescription market
that totals approximately $3.9 billion.
We employ a dual marketing approach to take advantage of the
former prescription nature of the long-acting guaifenesin market
and the OTC opportunity. Our 100-person professional sales force
educates physicians on the benefits of long-acting guaifenesin
products and encourages these physicians to recommend our
products to their patients. We launched a television, print and
radio advertising campaign to build awareness of the Mucinex
brand in the consumer market in November 2004.
According to IRI, for the 52-week period ended January 23,
2005, Mucinex was the seventh best-selling brand of the 168
brands in the cough, cold, allergy, and sinus market based on
retail dollar sales. Based on research we sponsored, aided brand
awareness of Mucinex has increased from 14% prior to the launch
of our advertising campaign in November 2004 to 55% for the four
weeks ended March 5, 2005. In addition, in June 2004,
Mucinex SE was recognized by NACDS Marketplace as the best new
product in the "Healthcare/ OTC" category. Later in
2004, Mucinex SE was voted the #1 new product in the
"Cough/ Cold/ Allergy" category at the Retail
Excellence Awards hosted by Drug Store News.
Our Business Strategy
Our goal is to be a leading specialty pharmaceutical company
with a focus on respiratory therapeutics by building
market-leading brands in the OTC and prescription pharmaceutical
markets. The key elements of our strategy to achieve this goal
are to:
•
Continue to Switch Prescriptions for Long-Acting Guaifenesin
    into Sales of Our Products.
Despite the removal of all
    competing long-acting, single-ingredient guaifenesin products
    from the U.S. market, physicians continue to write
    prescriptions for these products. In order to convert these and
    prescriptions for long-acting guaifenesin and dextromethorphan
    combination products into sales of Mucinex SE and Mucinex DM,
    respectively, our 100-person professional sales force details
    our Mucinex products to physicians and encourages them to write
    recommendations for our products.
•
Expand the Market by Educating Healthcare Professionals About
    the Benefits of Long-Acting Guaifenesin.
Because the
    prescription market for long-acting guaifenesin historically
    consisted primarily of generic products, physicians, pharmacists
    and other healthcare professionals were not regularly detailed
    about the benefits of long-acting guaifenesin. Our sales force
    seeks to educate these professionals as to the therapeutic value
    of long-acting guaifenesin in an effort to expand the market for
    our current and future products.
•
Build the Mucinex Brand in the Consumer Market.
While
    guaifenesin in short-acting (immediate release) formulations is
    a common ingredient in numerous OTC cough, cold and sinus
    remedies, prior to the FDA's approval of Mucinex SE as an
    OTC drug, long-acting guaifenesin was only available by
    prescription. Our consumer advertising strategy is to educate
    consumers about the unique benefits of Mucinex to encourage
    trial of our products. We believe that this campaign will expand
    consumer awareness of Mucinex and create a sustainable brand.
    Our current advertising campaign features an animated character
    called "Mr. Mucus" and the tag-line "Mucinex
    In, Mucus Out."
•
Launch New Products Under Our Existing Brands.
We seek to
    capture a larger share of the OTC cough, cold, allergy, and
    sinus market by launching new products under our Mucinex and
    Humibid brands. Our first three line extensions are Mucinex DM,
    Mucinex D and Humibid, all of which incorporate our patented
    technology for long-acting guaifenesin.
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Table of Contents
•
Develop Prescription Respiratory Products.
By applying
    our patented technology, we plan to develop products that
    combine long-acting guaifenesin with prescription active
    ingredients. We intend to use this strategy to enter
    prescription respiratory market segments. We are currently
    considering a number of product candidates for the prescription
    market. We will use our existing professional sales force to
    market these products to the physicians we currently target.
•
Continue to In-License or Acquire Respiratory Products and
    Brands.
We intend to expand our product portfolio by
    selectively in-licensing and acquiring prescription or OTC
    products or brands in the respiratory market. For example, we
    recently acquired the Humibid brand. We will focus on
    prescription products in the later stages of development and OTC
    brands that we believe can be expanded in the cough, cold,
    allergy, and sinus market. In addition, we are evaluating
    licensing respiratory prescription products available outside
    the United States and may seek FDA approval to introduce them in
    the U.S. market.
Company Information
Our principal executive offices are located at 425 Main
Street, Chester, New Jersey 07930, and our telephone number is
(908) 879-1400. Our website address is
www.adamsrt.com
. The information on our website is not a
part of this prospectus. We have included our website address in
this document as an inactive textual reference only. Adams,
A
Adams Respiratory Therapeutics, Humibid, Mucinex and
Mr. Mucus are our registered trademarks or are the subject
of pending trademark applications. Each of the other trademarks,
trade names or service marks of other companies appearing in
this prospectus is the property of its respective owner.
3
Table of Contents
The Offering
Common stock offered by us:
shares
Common stock offered by the selling stockholders:
shares
Common stock to be outstanding immediately after this offering:
shares
Use of proceeds:
We estimate that our net proceeds from this offering will be
    approximately $      million at an
    assumed initial public offering price of
    $     per share, after deducting the
    estimated underwriting discount and commissions and offering
    expenses. We expect to use the net proceeds from this offering
    to continue to build the Mucinex brand, fund product development
    and for general corporate purposes. See "Use of
    Proceeds."
We will not receive any proceeds from the sale of shares of
    common stock by the selling stockholders.
Proposed Nasdaq National Market Symbol:
ARxT
The number of shares of common stock to be outstanding
immediately after the offering is based
on                      shares
of common stock outstanding as
of                     ,
2005.
The number of shares of common stock to be outstanding after
this offering does not take into account:
•
10,223,480 shares of common stock issuable upon the
    exercise of stock options outstanding as of February 28,
    2005 with a weighted average exercise price of $0.69 per
    share;
•
9,561,971 shares of common stock issuable upon exercise of
    outstanding warrants as of February 28, 2005 with a
    weighted average exercise price of $0.61 per share; and
•
an aggregate of 1,276,520 shares of common stock reserved
    for future issuance under our equity incentive plans as of the
    completion of this offering.
In addition, except as otherwise noted, all information in this
prospectus:
•
assumes the underwriters do not exercise their over-allotment
    option;
•
gives effect to our reincorporation in the State of Delaware,
    which will occur prior to the closing of this offering;
•
assumes the conversion of our preferred stock into 48,055,162
    shares of our common stock; and
•
gives effect to
    a                     -for-                    reverse
    stock split of outstanding shares of our common stock, which
    will occur prior to the completion of this offering in
    connection with our reincorporation in the State of Delaware.
4
Table of Contents
Summary Financial Data
Set forth below is our summary financial data, in each case, at
the dates and for the periods indicated. The summary financial
information set forth below as of and for the years ended
June 30, 2004, 2003 and 2002 has been derived from our
audited financial statements and the summary financial
information as of and for the six months ended December 31,
2004 and 2003 has been derived from our unaudited financial
statements, in each case, included elsewhere in this prospectus.
The unaudited financial statements include, in the opinion of
management, all adjustments, consisting of normal recurring
accruals that management considers necessary for a fair
presentation of the financial information set forth in those
statements. Results of operations for the interim periods are
not necessarily indicative of the results that might be expected
for any other interim period or for an entire period.
The as adjusted balance sheet data gives effect to (a) the
issuance and sale
of                      shares
of common stock in this offering after deducting the
underwriting discount and commissions and estimated offering
expenses payable by us at an assumed initial public offering
price of
$          per
share, which is the mid-point of the estimated offering price
range on the cover of this prospectus and (b) the
conversion of all our outstanding preferred stock into an
aggregate of 48,055,162 shares of common stock upon
completion of this offering.
You should read this summary financial data together with our
financial statements and the related notes and the section of
this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Six Months Ended
December 31,
Years Ended June 30,
2004
2003
2004
2003
2002
(unaudited)
(in thousands, except per share amounts)
Statements of Operations Data
Net sales
$
62,021
$
27,074
$
61,295
$
14,038
$
13,755
Cost of goods sold
13,350
5,049
11,928
5,252
4,024
Gross margin
48,671
22,025
49,367
8,786
9,731
Selling, marketing and administrative(1)
30,768
9,834
23,286
23,310
17,968
Product development
3,059
1,719
3,181
4,542
7,419
Interest expense
52
1,582
3,403
3,601
—
Interest income
(294
)
(52
)
(205
)
(29
)
(180
)
Income/(loss) before income taxes
15,086
8,942
19,702
(22,638
)
(15,476
)
Provision/(benefit) for income taxes
5,858
—
(16,124
)
—
—
Net income/(loss)
9,228
8,942
35,826
(22,638
)
(15,476
)
Accretion of preferred stock
(10,953
)
(320
)
(590
)
(627
)
(619
)
Net (loss)/income applicable to common stockholders
$
(1,725
)
$
8,622
$
35,236
$
(23,265
)
$
(16,095
)
(Loss)/earnings per common share
Basic
$
(0.10
)
$
0.71
$
2.63
$
(2.64
)
$
(1.83
)
Diluted
$
(0.10
)
$
0.38
$
1.43
$
(2.64
)
$
(1.83
)
Pro forma earnings per common share(2)
Basic
$
0.14
$
0.58
Diluted
$
0.12
$
0.49
(1)
Selling, marketing and administrative expenses includes non-cash
    stock-based compensation expense as follows:
$
179
$
343
$
686
$
880
$
1,292
(2)
Please see Note 1 to our financial statements for an
    explanation of the method used to compute pro forma earnings per
    common share, basic and diluted, and the number of shares used
    in computing per share amounts.
5
Table of Contents
At December 31, 2004
Actual
As Adjusted
(unaudited)
(in thousands)
Balance Sheet Data
Cash, cash equivalents and short-term investments
$
36,720
Working capital
55,106
Total assets
85,977
Long-term liabilities
2,516
Redeemable convertible preferred stock
236,429
Accumulated deficit
(20,653
)
Total stockholders' (deficit) equity
(172,997
)
6
Table of Contents
RISK FACTORS
Buying shares of our common stock involves risk. You should
consider carefully the risks and uncertainties described below,
together with all of the other information in this prospectus,
including the financial statements and the related notes
appearing at the end of this prospectus, before deciding to
purchase shares of our common stock.
Risks Relating to Our Business
We depend heavily on the success of our existing products,
    Mucinex SE and Mucinex DM, and the strength of the Mucinex
    brand. If we are unable to continue to successfully
    commercialize our two current products and build the Mucinex
    brand, our results of operations and future prospects will
    suffer.
Mucinex SE and Mucinex DM are currently our only commercial
products. Sales of Mucinex SE accounted for approximately 86% of
our revenue in fiscal 2004 and approximately 76% of our revenue
for the first half of fiscal 2005. Sales of Mucinex DM accounted
for approximately 19% of our revenue in the first half of fiscal
2005. Within the next year we intend to launch Mucinex D, a
product combining long-acting guaifenesin with pseudoephedrine.
We anticipate that in the near term our ability to generate
revenues and establish our Mucinex brand will depend largely on
the continued success of Mucinex SE and Mucinex DM and the
successful commercialization of additional products that utilize
the Mucinex brand name. The extent of the commercial success of
our current Mucinex products will depend on several factors,
including the following:
•
expanding our manufacturing capacity with Cardinal Health, Inc.;
•
finding and qualifying alternative sources for our active and
    inactive pharmaceutical ingredients;
•
our ability to supply sufficient product to meet the demand of
    our customers;
•
launching commercial sales of Mucinex D and additional products
    in the future;
•
acceptance of long-acting guaifenesin products in the physician,
    pharmacist and consumer communities;
•
success of our consumer advertising and marketing campaigns;
•
whether the FDA takes action to enforce the removal of
    unapproved drugs similar to Mucinex DM and Mucinex D from the
    market; and
•
our ability to sustain and grow market share relative to OTC and
    prescription cough, cold, allergy, and sinus remedies.
Any failure or delay in our efforts to successfully
commercialize our products could have a negative impact on our
revenues and ability to execute our business strategy.
We do not have our own manufacturing capability and rely
    on Cardinal Health to manufacture Mucinex SE and Mucinex DM at a
    single facility. Pursuant to our agreement with Cardinal Health,
    we have agreed to use Cardinal Health as the exclusive
    manufacturer of Mucinex SE and Mucinex DM, as well as
    additional products we develop. If Cardinal Health fails to meet
    our requirements, our commercialization efforts may be
    materially harmed.
We do not have our own manufacturing capability and currently
rely on a single third party to manufacture Mucinex SE, Mucinex
DM and future products that we develop. We have an exclusive
arrangement with Cardinal Health for the manufacture of our
products. For a ten-year term beginning April 2004, we agreed to
use Cardinal Health as the exclusive manufacturer of our current
products and all of our future drug products, unless Cardinal
Health is unable to manufacture such products or unable to
obtain the means to do so within a reasonable timeframe. As a
result of this arrangement, we are
7
Table of Contents
unable to diversify our manufacturing sources and are vulnerable
to any interruptions in our supply from Cardinal Health.
In addition, Cardinal Health currently manufactures Mucinex SE
and Mucinex DM at a single dedicated facility that has been
unable to supply sufficient quantities to meet the demand for
these products. At February 28, 2005, we had open orders
for our products of approximately $16 million. We are
working with Cardinal Health to obtain the necessary additional
manufacturing capacity by having Cardinal Health install
additional manufacturing lines at the existing, dedicated
facility and qualifying with the FDA a second Cardinal Health
facility to manufacture our products. If we are unable to
increase the manufacturing capacity, or unable to obtain the
additional capacity on reasonable economic terms, we may not be
able to produce our products in sufficient quantities to meet
the demand, which could negatively impact our revenues and
operating results. The addition of such capacity on unfavorable
terms could also affect our revenue and profitability. In
addition, any damage to, or disruption at, Cardinal
Health's facility could halt production of our products and
materially harm our business.
We intend to continue to rely on third parties to manufacture
our products. Reliance on third party manufacturers entails
risks to which we would not be subject if we manufactured
products ourselves, including:
•
the possibility that third parties may not comply with the
    FDA's current Good Manufacturing Practices, or cGMP,
    regulations, other regulatory requirements and quality assurance;
•
the possible breach of manufacturing agreements by third parties
    due to factors beyond our control; and
•
the possibility of termination or nonrenewal of an agreement by
    a third party, based on their own business priorities, at a time
    that is costly or inconvenient for us.
In the event of a supply disruption or a deterioration in our
product quality from a third party manufacturer, we would need
to rely on alternative manufacturing sources or identify and
qualify new manufacturers. We may not be able to identify or
qualify such manufacturers in a timely manner or obtain a
sufficient allocation of their capacity to meet our
requirements. In addition, alternative vendors must comply with
product validation and stability testing, which may involve
additional manufacturing expense, or delay in production or
regulatory approvals. The consequence of any resulting delays in
meeting demand could negatively impact our inventory levels,
sales, profitability, and reputation.
We have the ability under our supply agreement with Cardinal
Health to repurchase the Fort Worth, Texas manufacturing
facility. This repurchase may disrupt supply of our products,
would involve a substantial amount of time and money to complete
and could distract our senior management from the day-to-day
operations of our business.
We and Cardinal Health depend on a single supplier for
    guaifenesin, the active ingredient in our Mucinex product line,
    and our current supplier for dextromethorphan, the additional
    active ingredient in Mucinex DM, is exiting the business.
Currently, Cardinal Health obtains all of the guaifenesin for
our products, the active ingredient in our Mucinex product line,
from a single supplier, Boehringer Ingelheim Chemicals, Inc.
According to Cardinal Health's agreement with Boehringer
Ingelheim, which lasts through June 2006, Cardinal Health must
purchase from Boehringer Ingelheim all of the guaifenesin used
in Mucinex SE and at least 90% of the guaifenesin used in our
products produced under all subsequent new drug applications, or
NDAs. Under certain circumstances, Boehringer Ingelheim is
entitled to adjust the prices Cardinal Health pays upon written
notice. Boehringer Ingelheim is currently qualifying a second
dryer for guaifenesin. If Boehringer Ingelheim is unable to
increase manufacturing capacity, they will not be able to meet
our demand for guaifenesin.
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The supplier from whom Cardinal Health has historically obtained
dextromethorphan, the additional active ingredient in Mucinex
DM, reduced their production of this substance in 2004. Cardinal
Health was able to obtain an additional supply of
dextromethorphan, which we expect will meet our needs through
December 2006. Cardinal Health has not qualified an alternative
supplier for dextromethorphan, and if an alternative supplier
for dextromethorphan is not qualified prior to the depletion of
the existing supply of dextromethorphan, which could be prior to
2006, we will not be able to supply Mucinex DM.
The FDA requires that all manufacturers of pharmaceutical
ingredients for sale in, or from, the United States achieve and
maintain compliance with the cGMP regulations and guidelines.
There are a limited number of manufacturers operating under cGMP
regulations that are capable of manufacturing either guaifenesin
or dextromethorphan. We do not currently have alternative
sources for production of either ingredient, and Cardinal Health
has a limited ability to enter into relationships with
alternative guaifenesin suppliers without terminating its
agreement with Boehringer Ingelheim. Cardinal Health may be
unable to utilize alternative manufacturing sources for these
ingredients or to obtain such manufacturing on commercially
reasonable terms or on a timely basis. Any transfer of Cardinal
Health's sources of supply to other manufacturers will
require the satisfaction of various regulatory requirements,
which could cause Cardinal Health to experience significant
delays in receiving adequate supplies of guaifenesin,
dextromethorphan or both. Any delays in the manufacturing
process may adversely impact our ability to meet commercial
demand on a timely basis, which would negatively impact our
revenues, reputation and business strategy.
We cannot ensure that the FDA will enforce removal from
    the market of the existing prescription long-acting guaifenesin
    combination products similar to Mucinex DM and
    Mucinex D, and we cannot ensure that products containing
    long-acting guaifenesin that are competitive with our products
    will not be introduced into the OTC market.
As described more fully under the section entitled
"Government Regulation," following its approval of
Mucinex SE, the FDA took enforcement action to remove all
existing long-acting, single-ingredient guaifenesin
single-entity products from the market. We believe that sales of
Mucinex SE increased as a result of the FDA's action and
its resulting status as the only drug of its kind to be approved
by the FDA for marketing and sale in the United States. The FDA
approved Mucinex DM in April 2004 and Mucinex D in June 2004. As
of the date of this prospectus, the FDA has not taken any action
to remove from the market existing, long-acting guaifenesin and
dextromethorphan combination products, which are similar to
Mucinex DM, and existing, long-acting guaifenesin and
pseudoephedrine combination products, which are similar to
Mucinex D. We have no assurance that the FDA will ever undertake
this action and we may never achieve the increase in sales we
would anticipate if the FDA removed these competing, unapproved
products from the market.
In addition, as described more fully under the section entitled
"Government Regulation," based on our patent position
and regulatory requirements, we estimate that the process of
developing and obtaining the necessary FDA approvals for
competitive long-acting guaifenesin products would take two to
three years from the start of this process. However, it is
possible that competitors have already begun the process of
developing and obtaining FDA approval for products competitive
with Mucinex SE or our other products. As a result, we
cannot be sure that the effective market exclusivity that we
currently enjoy for Mucinex SE, and would enjoy if the FDA
removes from the market products similar to Mucinex DM or
Mucinex D, will continue for any period of time into the
future. If competitive long-acting guaifenesin OTC products are
approved, our growth may be slowed or our results of operations
may be adversely affected.
Our products and all of our product candidates rely on
    guaifenesin, which is an expectorant. If our competitors develop
    a superior expectorant, our products and our patented technology
    may be rendered obsolete.
Guaifenesin is a fundamental component in all of our currently
marketed products and product candidates. Guaifenesin and the
other active ingredients in our products and product candidates
have been
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used for many years. Our competitors may develop new chemicals
or compounds that render guaifenesin, our patented delivery
system or our products obsolete. We can offer no assurance that
our development efforts will be able to lead or keep pace with
discoveries or technological advances that yield superior
compounds or products, or that we will recover our investment in
our products before any such advancements render them obsolete.
We depend on a limited number of customers for a large
    portion of our sales and demands made by, or the loss of, one or
    more of these customers could significantly reduce our margins
    or sales and adversely affect our business and financial
    results.
For the six months ended December 31, 2004, our top five
and ten customers accounted for an aggregate of approximately
63% and 82% of our gross sales, respectively. CVS, McKesson
Corporation, Walgreens, and Wal-Mart each accounted for greater
than 10% of our gross sales for the six months ended
December 31, 2004. We expect that, for the year ended
June 30, 2005 and future periods, our top five and ten
customers will, in the aggregate, continue to account for a
large portion of our sales. In addition, retailers have
demanded, and may continue to demand, increased service and
other accommodations, as well as price concessions. As a result,
we may face downward pressure on our prices and increased
expenses to meet these demands, which would reduce our margins.
Given the growing trend toward consolidation of retailers, we
expect demands by customers and the concentration of our sales
in a small number of customers to increase. The loss of one or
more of our top customers, any significant decrease in sales to
these customers, pricing concessions or other demands made by
these customers, or any significant decrease in our retail
display space in any of these customers' stores could
reduce our sales and margins and could have a material adverse
effect on our business, financial condition and results of
operations.
We face substantial competition that may prevent us from
    maintaining or increasing market share for our existing products
    and gaining market acceptance of our future products. Our
    competitors may develop or commercialize products before or more
    successfully than us.
Our competitors may develop products that are superior to ours
or may more effectively market products that are competitive
with ours. We believe that Mucinex SE and Mucinex DM compete
primarily with products with strong brand awareness marketed by
large pharmaceutical companies such as:
•
Pfizer, Inc. (Sudafed® and Benadryl®);
•
The Procter & Gamble Company (Dayquil® and
    Nyquil®);
•
McNeil PPC, Inc., an operating company of Johnson &
    Johnson (Tylenol Cold and Flu® and Motrin Cold and
    Sinus®);
•
Wyeth (Robitussin®, Dimetapp® and Advil Cold and
    Sinus®);
•
Novartis AG (Theraflu® and Triaminic®);
•
Schering–Plough Corp. (Claritin®, Coricidin® and
    Drixoral®); and
•
Bayer AG (Alka Seltzer Plus Cold® and Aleve Cold and
    Sinus®).
We also face substantial competition from companies that market
private label brands to our largest customers, which are
typically sold at lower prices than our products.
With respect to all of our existing and future drug products,
regardless of whether such products are sold by prescription or
OTC, we will compete with companies working to develop products
and technologies that are more effective, safer or less costly
than our products and technologies. Our competitors may also
obtain FDA or other regulatory approval for their products more
rapidly than us, have larger or more skilled sales forces to
promote their products and develop more comprehensive protection
for their technologies. Many of these competitors have
substantially greater financial, technical and human resources
than we do. Moreover, additional mergers and acquisitions in the
pharmaceutical industry may result in our competitors having an
even greater concentration of resources. We may not be
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able to maintain market acceptance of our products or
successfully introduce new products if our competitors develop
different or more advanced products, bring such products to
market before we do or market their products more effectively in
the OTC and prescription markets.
With respect to our Mucinex SE, Mucinex DM and our other future
OTC products, we also compete for brand recognition and product
availability at retail stores. In addition, we compete with our
competitors on price. Advertising, promotion, merchandising,
packaging, and the timing of new product introductions and line
extensions also have a significant impact on consumer buying
decisions and, as a result, on our sales. The large
pharmaceutical companies we compete against in the OTC market
have considerably greater financial resources than we do and
likely spend more on trade promotions and advertising. These
competitors also likely benefit from greater purchasing power,
stronger vendor relationships and broader distribution channels.
Sales of our products also affect in-store position, wall
display space and inventory levels in retail outlets. We have
not been able to supply sufficient quantities of Mucinex SE and
Mucinex DM to meet retail demand in recent months. If we are not
able to improve inventory levels of Mucinex SE or Mucinex DM,
maintain or improve in-store positioning of our products in
retail stores, conduct effective advertising campaigns and other
consumer and professional promotional programs, and maintain
distribution and supply arrangements on competitive terms, we
risk losing market share to our competitors in the OTC market.
We have generated net income for a short time and may not
    generate net income in the future.
We have generated net income for only five consecutive quarters
and the fiscal year ended June 30, 2004 is the first year
we have shown net income. Our ability to maintain profitability
depends on our ability to generate revenue from existing
products and our ability to successfully develop, obtain
regulatory approval for, manufacture, and commercialize our
product candidates. Because of the numerous risks and
uncertainties associated with our business, we can offer no
assurance that we will continue to be profitable.
Adverse publicity associated with us or our products could
    have a material adverse effect on us.
We are highly dependent upon consumer perceptions of us, the
Mucinex brand and the safety and quality of our products. We
could be adversely affected if we or the Mucinex brand is
subject to negative publicity. We could also be adversely
affected if any of our products or any similar products
distributed by other companies prove to be, or are asserted to
be, harmful to consumers. Also, because of our dependence upon
consumer perceptions, any adverse publicity associated with
illness or other adverse effects resulting from consumers'
use or misuse of our products or any similar products
distributed by other companies could have a material adverse
impact on our results of operations.
Product liability lawsuits could divert our resources,
    result in substantial liabilities and reduce the commercial
    potential of our products.
Our business exposes us to the risk of product liability claims
that is inherent in the manufacturing, testing and marketing of
drugs and related products. These lawsuits may divert our
management from pursuing our business strategy and may be costly
to defend. In addition, if we are held liable in any of these
lawsuits, we may incur substantial liabilities and may be forced
to limit or forgo further commercialization of those products.
Although we maintain general liability and product liability
insurance, this insurance may not fully cover potential
liabilities. In addition, our inability to obtain or maintain
sufficient insurance coverage at an acceptable cost or to
otherwise protect against potential product liability claims
could prevent or inhibit the commercial production and sale of
our products, which could adversely affect our business.
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If
we fail to obtain an adequate level of reimbursement for our
products by Medicaid, our business may be adversely
affected.
The availability and levels of reimbursement by Medicaid affect
the market for both our current and future products. Medicaid
continually attempts to contain or reduce the costs of
healthcare by challenging the prices charged for
pharmaceuticals. For example, we are obligated to provide
rebates to the state Medicaid programs on sales of our products
to Medicaid beneficiaries. We expect to experience pricing
pressures in connection with the sale of our current and future
products due to potential increases in rebates and other
downward trends in reimbursement aimed at reducing healthcare
costs and legislative proposals.
Medicaid does not generally cover the costs of OTC products.
Twenty-five state programs, however, have covered, and continue
to cover, the cost of long-acting guaifenesin products,
including our products. There is no assurance that any Medicaid
program will cover any of our new products or will continue to
cover our current products.
Seasonal fluctuations in demand for our current Mucinex
    products may cause our operating results to vary significantly
    from quarter to quarter.
Retail sales of our products have historically been concentrated
between October 1 and March 31 due to the prevalence
of respiratory congestion and cough during the cough, cold and
flu season. We generally ship products and recognize revenue in
the quarter prior to retail sales. In addition, fluctuations in
the severity of the annual cough, cold and flu season may cause
our operating results to vary from year to year. Due to these
seasonal fluctuations in demand, our operating results in any
particular quarter may not be indicative of the results for any
other quarter or for the entire year.
Risks Related to Product Development
We may not be successful in our efforts to expand our
    portfolio of products.
We intend to expand our portfolio of products by:
•
developing and commercializing line extensions of Mucinex by
    combining long-acting guaifenesin with other ingredients to
    address various respiratory conditions;
•
developing and commercializing prescription products to address
    additional segments of the respiratory market using our platform
    technology for extended-release guaifenesin; and
•
acquiring or in-licensing additional technologies and additional
    pharmaceutical products or product candidates in the respiratory
    therapeutics market.
These efforts may not be successful for a variety of reasons,
including:
•
we may not receive marketing approvals from the FDA for products
    currently under development or we may encounter unforeseen costs
    or delays in pursuing such approvals;
•
our internal product development programs may not yield product
    candidates that are safe, effective and commercially viable;
•
we may not be able to identify suitable technologies or products
    within our areas of expertise or we may not be able to acquire
    suitable technologies and products on commercially attractive
    terms; or
•
we will depend on third parties in the conduct of our clinical
    trials for future product candidates and these parties may fail
    to fulfill their obligations.
Our failure to expand our portfolio of products in both the
prescription and OTC respiratory therapeutic markets, or any
unexpected delays in launching new products, will impair our
ability to execute our growth strategy, which will negatively
affect our financial position and results of operations.
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We intend to conduct clinical trials on product candidates
    we develop or acquire in the future, which will be costly, take
    years to complete and may not ultimately be successful.
As part of our business strategy, we intend to pursue product
candidates that must undergo preclinical studies and clinical
trials as a condition to regulatory approval. Preclinical
studies and clinical trials are expensive and, because we do not
have the ability to conduct our own clinical trials, we will
hire third parties to run the trials, which will lessen our
control over the process. Clinical trials may take several years
to complete and may not be successful. The commencement and
completion of clinical trials may be delayed by many factors,
including:
•
our inability to obtain materials sufficient for use in
    preclinical studies and clinical trials;
•
delays in patient enrollment and variability in the number and
    types of patients available for clinical trials;
•
difficulty in maintaining contact with patients after treatment,
    resulting in incomplete data;
•
inability to demonstrate effectiveness of product candidates
    during clinical trials;
•
unforeseen safety issues or side effects;
•
governmental or regulatory delays and changes in regulatory
    requirements, policy and guidelines; or
•
varying interpretation of data by the FDA.
Although we have not been required to conduct extensive clinical
trials to obtain FDA approval of our existing products, we
expect that many of our future product candidates may require
extensive clinical trials. We may not successfully complete
clinical trials for our product candidates. Accordingly, we may
not receive the regulatory approvals needed to market our
product candidates. Any failure or delay in commencing or
completing clinical trials or obtaining regulatory approvals for
our product candidates would delay or prevent the
commercialization of such product candidates, which could
negatively impact our financial position.
Regulatory Risks
Products approved for marketing remain subject to
    regulation. Complying with such regulation can be costly and
    failure to comply could result in a loss of approvals or
    suspension of product sales.
We are subject to extensive regulation by the FDA and, to a
lesser extent, by other applicable federal agencies, such as the
Consumer Product Safety Commission, the Drug Enforcement
Administration, the Federal Trade Commission, or FTC, the
Environmental Protection Agency, and state government agencies.
The Federal Food, Drug and Cosmetic Act, the Controlled
Substances Act and other federal statutes and rules regulate the
testing, manufacture, packaging, labeling, storage, record
keeping, promotion, distribution, and sale of our products. If
we or our manufacturers fail to comply with those regulations,
we could become subject to significant penalties or claims,
which could materially and adversely affect our operating
results or our ability to conduct our business. In addition, the
adoption of new regulations or changes in the interpretations of
existing regulations may result in significant compliance costs
or discontinuation of product sales and may adversely affect our
revenue and the marketing of our products.
In accordance with the Federal Food, Drug and Cosmetic Act and
FDA regulations, the manufacturing processes of our third party
manufacturers must also comply with cGMPs. The FDA inspects the
facilities of our third party manufacturers periodically to
determine if our third party manufacturers are complying with
cGMPs. The FDA may implement additional regulations with which
we would have to comply, which would increase our expenses.
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Additionally, if we or our third party manufacturers fail to
comply with federal or state regulations, we could be required
to:
•
suspend manufacturing operations;
•
change product formulations;
•
suspend the sale of products with non-complying specifications;
•
initiate product recalls; or
•
change product labeling, packaging or advertising or take other
    corrective action.
Any of these actions could materially and adversely affect our
financial results.
Further, our failure to comply with the FDA, FTC or state
regulations relating to our product claims and advertising may
result in enforcement actions and imposition of penalties or
otherwise materially and adversely affect our marketing strategy
and product sales.
We may not be able to obtain marketing approval for any of
    the products resulting from our development efforts and failure
    to obtain these approvals could materially harm our
    business.
All new medicines must be approved by the FDA before they can be
marketed and sold in the United States. Successfully completing
extensive clinical trials and demonstrating manufacturing
capability is typically required to obtain FDA approval, as
described more fully under "Government Regulation."
Clinical development is expensive, uncertain and lengthy, often
taking a number of years for a NDA to be filed with and
ultimately approved by the FDA. Of the large number of drugs in
development, only a small percentage result in the submission of
a NDA to the FDA and even fewer are approved for
commercialization.
We may need to successfully address a number of challenges in
order to complete the development of our future products. For
example, to obtain marketing approval for a new product
candidate, we and our third party manufacturers will be required
to consistently produce the active pharmaceutical ingredient in
commercial quantities and of specified quality on a repeated
basis. This requirement is referred to as process validation. If
we are unable to satisfy this process validation requirement for
a future product candidate, through our third party
manufacturers or otherwise, we will not receive approval to
market such product.
In addition, the FDA and other regulatory agencies may apply new
standards for safety, manufacturing, packaging, and distribution
of future product candidates. Complying with such standards may
be time consuming or expensive and could result in delays in our
obtaining marketing approval for future product candidates, or
possibly preclude us from obtaining such approval. Such a delay
could also increase our commercialization costs, possibly
materially.
Furthermore, our future products may not be effective or may
prove to have undesirable or unintended side effects, toxicities
or other characteristics that may preclude us from obtaining
regulatory approval or prevent or limit commercial use. The FDA
and other regulatory authorities may not approve any product
that we develop. Even if we do obtain regulatory approval, such
regulatory approvals may be subject to limitations on the
indicated uses for which we may market a product, which may
limit the size of the market for such product.
The manufacture and packaging of pharmaceutical products
    such as our Mucinex product line are subject to the requirements
    of the FDA. If we or our third party manufacturers fail to
    satisfy these requirements, our product development and
    commercialization efforts may be materially harmed.
As indicated above, an approved drug and its manufacturer are
subject to continual review, including review and approval of
the manufacturing facilities. Changes in the manufacturing
process or procedure, including a change in the location where
the product is manufactured or a change of a third party
manufacturer, may require prior FDA review or approval or
revalidation of the manufacturing
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process and procedures in accordance with cGMP. This review or
revalidation may be costly and time consuming and could delay or
prevent the launch or delivery of a product. To effect a change
of site, we and the manufacturer must transfer the relevant
manufacturing technology to the new site. This process is
detailed and time consuming. If we change the manufacturing
site, the FDA will likely require us to perform analytical tests
to demonstrate that changing the manufacturing location will not
affect the characteristics of the product. If we cannot
establish to the satisfaction of the FDA that the products
manufactured at the new site are equivalent to those
manufactured at the prior site, we may not obtain, or may be
delayed in obtaining, approval to manufacture our products at
the new site. In addition, if we elect to manufacture products
at the facility of another third party, we would need to ensure
that the new facility and the manufacturing process are in
compliance with cGMP. Any such new facility would be subject to
a preapproval inspection by the FDA.
Furthermore, in order to obtain approval by the FDA of new
products, we need to complete testing on both the active
pharmaceutical ingredient and on the finished product in the
packaging we propose for commercial sales. This testing includes
testing of stability, identification of impurities and testing
of other product specifications by validated test methods. If
the required testing is delayed or produces unfavorable results,
we may not obtain approval to launch the product or approval may
be delayed.
If we or others identify side effects after our products
    are on the market, we may be required to withdraw our products
    from the market, perform lengthy additional clinical trials or
    change the labeling of our products, any of which would hinder
    or preclude our ability to generate revenues.
If we or others identify side effects after any of our products
are on the market:
•
regulatory authorities may withdraw their approvals;
•
we may be required to reformulate our products, conduct
    additional clinical trials, change the labeling of our products,
    or implement changes to obtain new approvals of
    manufacturers' facilities;
•
we may recall the affected products from the market;
•
we may experience a significant drop in sales of the affected
    products;
•
our reputation in the marketplace may suffer;
•
we may become the target of lawsuits, including class action
    suits; and
•
we may be required to withdraw our products from the market and
    not be able to re-introduce them into the market.
Any of these events could harm or prevent sales of the affected
products or could substantially increase the costs and expenses
of commercializing or marketing these products.
Our products are subject to recalls even after receiving
    FDA regulatory clearance or approval. Recalls could harm our
    reputation and business.
We are subject to ongoing reporting regulations that require us
to report to the FDA if our products cause or contribute to a
death or serious injury. These reports can lead to stricter
safety warnings on product labeling, voluntary company recalls
or withdrawal of the product from the market. In addition, if we
become aware of adverse event reports, manufacturing defects or
insufficient labeling, we may voluntarily elect to recall one of
our products. Any recall, which must be reported to and
supervised by the FDA, would divert managerial and financial
resources and could harm our reputation with all of our
customers and with the health care professionals who recommend
our products, which may have a material adverse effect on our
business.
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Mucinex D may be subject to additional governmental
    regulation.
Our Mucinex D product contains pseudoephedrine HCl, a
FDA-approved ingredient for the relief of nasal congestion. We
intend to launch this product in the first quarter of 2006. We
understand that pseudoephedrine has been used in the illicit
manufacture of methamphetamine, a dangerous and addictive drug.
To date, we believe that nine states have enacted regulations
concerning the sale of pseudoephedrine, including limiting the
amount of these products that can be purchased at one time, or
requiring that these products be located behind the counter,
with the stated goal of deterring the illicit/illegal
manufacture of methamphetamine. Were such regulations to be
adopted throughout the United States, the impact of such
regulations on our sales of Mucinex D and the maximum strength
version of the same product cannot be predicted.
Risks Related to Managing Growth
We depend on our key personnel and if we are not able to
    retain them or recruit additional technical personnel, our
    business will suffer.
We are highly dependent on the principal members of our
management. The continued service of our Chief Executive Officer
and President, Michael J. Valentino, is critical to our success.
Mr. Valentino is the only member of our management team
with whom we have entered into an employment agreement, but he
may terminate it on short or no notice.
The loss of any of our other executive officers, including our
Chief Financial Officer, David Becker, our Senior Vice President
of Research and Development, Helmut Albrecht, our Vice
President, Secretary and General Counsel, Walter E. Riehemann,
our Vice President of Business Development and Consumer
Marketing, Robert Casale, our Vice President of Regulatory
Affairs, Susan Witham, or our Vice President of Sales and
Professional Marketing, John Thievon, could cause disruption in
our business. We do not carry key man life insurance on any of
our key personnel.
In addition, our growth will require us to hire a significant
number of qualified technical personnel. Intense competition
exists among other companies and research and academic
institutions for qualified personnel. If we cannot continue to
attract and retain, on acceptable terms, the qualified personnel
necessary for the continued development of our business, we may
not be able to sustain our operations or grow our business.
We may undertake strategic acquisitions of technologies
    and products. Integration of such technologies and products will
    involve a variety of costs and we may never realize the
    anticipated benefits of such acquisitions.
We intend to pursue opportunities to acquire technologies,
brands and products that would allow us to leverage our
professional sales force or our marketing and development
expertise or enhance our product portfolio or brand recognition
in the OTC and prescription markets. Acquisitions typically
entail many risks, including risks related to the integration of
the technologies and products. In attempting to integrate such
technologies and products, we may experience unexpected
integration costs and delays, which may divert management and
employee attention and disrupt our ability to develop and
introduce new products. If we are not able to successfully
integrate our acquisitions, we may not be able to realize the
intended benefits of the acquisition.
As a result of acquiring products or entering into other
significant transactions, we have experienced, and will likely
continue to experience, significant charges to earnings for
acquisitions and related expenses, including transaction costs,
closure costs or acquired in-process research and development
charges. These costs may include substantial fees for investment
bankers, attorneys, accountants, and financial printing costs.
Charges that we may incur in connection with acquisitions could
adversely affect our results of operations for particular
quarterly or annual periods.
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Risks Relating to Intellectual Property
If our patent position does not adequately protect our
    products and future products, others will be able to compete
    against us more directly, which may harm our business.
Our patent portfolio includes one U.S. patent, two foreign
patents and several patent applications. Our most significant
patent is currently the U.S. patent, which contains claims
covering a long-acting guaifenesin product, including an
immediate release portion and an extended-release portion that
yields a certain pharmacokinetic profile. The active ingredients
in our products and most of our product candidates, including
guaifenesin, dextromethorphan and pseudoephedrine, are chemical
compounds that have been in existence for many years and are not
covered by patents that claim these chemical compounds. Our
patents cover a formulation of a product that delivers
guaifenesin with a bi-phasic release pattern. They do not and
will not contain compound claims for the chemicals in these
products. We cannot be sure that our patents will effectively
exclude competitors from introducing similar, or even more
effective, products offering the same ingredients employing a
different delivery system.
Our success will depend, in large part, on our ability to obtain
additional patents in the United States, maintain our existing
patent position and obtain and maintain adequate protection for
the other intellectual property incorporated into our products.
Our patents may be challenged, narrowed, invalidated, or
circumvented, which could limit our ability to stop competitors
from marketing similar products or limit the length of term of
patent protection we may have for our products. We cannot be
sure that we will receive patents for any of our pending patent
applications or any patent applications we may file in the
future. In addition, our patents may not afford us protection
against competitors with similar technology. Because patent
applications in the United States and many foreign jurisdictions
are typically not published until 18 months after filing,
or in some cases not at all, and because publications of
discoveries in the scientific literature often lag behind actual
discoveries, we cannot be certain that we were the first to make
the inventions claimed in issued patents or pending patent
applications or that we were the first to file for protection of
the inventions set forth in these patent applications. If we do
not adequately protect our intellectual property, competitors
may be able to use our technologies and erode or negate any
competitive advantage we may have, which could harm our business
and financial results.
If we are unable to protect the intellectual property
    rights related to our brands, our ability to compete effectively
    in the markets for our products could be negatively
    impacted.
A significant part of our business strategy is to position
Mucinex as a preferred brand for relief of respiratory
congestion for the OTC cough, cold, allergy, and sinus market.
We believe that familiarity with our brand is an important
competitive advantage and that the growth and sustainability of
our market share for the Mucinex product line will depend to a
significant extent upon the goodwill associated with our related
trademarks and trade names. We intend to use the trademarks and
trade names on our products to convey that the products we sell
are "brand name" products, and we believe consumers
ascribe value to our brands. We own the material trademark and
trade name rights used in connection with the packaging,
marketing and sale of our Mucinex products. This ownership
prevents our competitors or new entrants to the market from
using our brand names. Therefore, we view trademark and trade
name protection as critical to our business. Although most of
our trademarks are registered in the United States, we may not
be successful in asserting trademark or trade name protection.
If we were to lose the exclusive right to use the Mucinex brand
name or other brand names we establish or acquire in the future,
our sales and operating results could be materially and
adversely affected. We could also incur substantial costs to
prosecute or defend legal actions relating to the use of our
trademarks and trade names, which could have a material adverse
effect on our business, results of operations or financial
condition.
Additionally, other parties may infringe on our property rights
in our trademarks and trade names, which may dilute the value of
our brands in the marketplace. Our competitors may also
introduce brands that cause confusion with our brands in the
marketplace, which could adversely affect the value that our
customers associate with our brands and thereby negatively
impact our sales. Any such infringement of our intellectual
property rights would also likely result in a commitment of our
time and resources to protect
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these rights through litigation or otherwise. In addition, third
parties may assert claims against our trademark and trade name
rights, and we may not be able to successfully resolve these
claims. In such event, we may lose our ability to use the brand
names that were the subject of these claims, which could have a
material adverse impact on our sales and operating results.
If we are unable to protect the confidentiality of our
    trade secrets and proprietary information, our technology and
    information may be used by others to compete against us.
In addition to patented technology, we rely upon unpatented
proprietary technology, processes and know-how. We seek to
protect this information in part by confidentiality agreements
with our employees, consultants and third parties. These
agreements may be breached, and we may not have adequate
remedies for any such breach. In addition, our trade secrets may
otherwise become known or be independently discovered by
competitors. If we do not adequately protect our trade secrets
and proprietary information, competitors may be able to use our
technologies and erode or negate any competitive advantage we
may have, which could harm our business and financial results.
Legal proceedings or third party claims of intellectual
    property infringement may require us to spend time and money and
    could prevent us from developing or commercializing
    products.
Our technologies, products or potential products in development
may infringe rights under patents or patent applications of
third parties. Third parties may own or control these patents
and patent applications in the United States and abroad. These
third parties could bring claims against us that would cause us
to incur substantial expenses and, if successful, could cause us
to pay substantial damages. Further, if a patent infringement
suit were brought against us, we could be forced to stop or
delay research, development, manufacturing, or sales of the
product or product candidate that is the subject of the suit.
As a result of patent infringement claims, or to avoid potential
claims, we may choose to seek, or be required to seek, a license
from the third party and would most likely be required to pay
license fees or royalties or both. These licenses may not be
available on acceptable terms, or at all. Even if we were able
to obtain a license, the rights may be nonexclusive, which would
give our competitors access to the same intellectual property.
Ultimately, we could be prevented from commercializing a product
or be forced to cease some aspect of our business operations if,
as a result of actual or threatened patent infringement claims,
we are unable to enter into licenses on acceptable terms. This
inability to enter into licenses could harm our business
significantly.
The pharmaceutical industry has experienced substantial
litigation and other proceedings regarding patent and other
intellectual property rights. In addition to infringement claims
against us, we may become a party to other patent litigation and
other proceedings, including interference proceedings declared
by the United States Patent and Trademark Office and opposition
proceedings in the European Patent Office, regarding
intellectual property rights with respect to our products and
technology. The cost to us of any patent litigation or other
proceeding, even if resolved in our favor, could be substantial.
Some of our competitors may be able to sustain the costs of such
litigation or proceedings more effectively because of their
substantially greater financial resources. Uncertainties
resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse
effect on our ability to compete in the marketplace. Patent
litigation and other proceedings may also absorb significant
management time.
Risks Relating to Future Financing Needs
We may need additional financing, which may be difficult
    to obtain. Our failure to obtain necessary financing or doing so
    on unattractive terms could adversely affect our marketing and
    development programs and other operations.
We will require substantial funds to commercialize our products,
launch new products, promote our brand, and conduct development,
including preclinical testing and clinical trials, of our
potential products. We currently believe that we will generate
sufficient revenue through our product sales, together
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with our net proceeds from this offering, to fund our
anticipated levels of operations through at
least                     .
However, our future capital requirements will depend on many
factors, including:
•
the success of our commercialization of Mucinex SE and Mucinex
    DM and the costs associated with related marketing, promotional
    and sales efforts;
•
the timing of new product launches, product development and
    advancement of other product candidates into development;
•
potential acquisition or in-licensing of other products or
    technologies;
•
the timing of, and the costs involved in, obtaining regulatory
    approvals;
•
the cost of manufacturing activities, including raw material
    sourcing and regulatory compliance; and
•
the costs involved in establishing and protecting our patent,
    trademark and other intellectual property rights.
Additional financing may not be available to us when we need it
or on favorable terms. If we are unable to obtain adequate
financing on a timely basis, we may be required to significantly
curtail one or more of our marketing, development, licensing, or
acquisition programs. We could be required to seek funds through
arrangements with others that may require us to relinquish
rights to some of our technologies, product candidates or
products that we would otherwise pursue on our own. If we raise
additional funds by issuing equity securities, our then-existing
stockholders will experience dilution and the terms of any new
equity securities may have preferences over our common stock.
Risks Related to This Offering
We have broad discretion in the use of the net proceeds
    from this offering and may not use them effectively.
We cannot specify with certainty the particular uses of the net
proceeds that we will receive from this offering. Our management
will have broad discretion in the application of the net
proceeds, including for any of the purposes described in the
"Use of Proceeds" section of this prospectus. Our
stockholders may not agree with the manner in which our
management chooses to allocate and spend the net proceeds. The
failure by our management to apply these funds effectively could
have a material adverse effect on our business. Pending their
use, we may invest the net proceeds from this offering in a
manner that does not produce income or that loses value.
After this offering, our executive officers, directors and
    major stockholders will maintain the ability to control all
    matters submitted to stockholders for approval.
When this offering is completed, our executive officers,
directors and stockholders who owned more than 5% of our
outstanding common stock before the completion of this offering,
will, in the aggregate, beneficially own shares representing
approximately                     %
of our capital stock. As a result, if these stockholders were to
choose to act together, they would be able to control all
matters submitted to our stockholders for approval, as well as
our management and affairs. For example, these persons, if they
choose to act together, will control the election of directors
and approval of any merger, consolidation or sale of all or
substantially all of our assets. This concentration of voting
power could delay or prevent an acquisition of our company on
terms that other stockholders may desire.
Provisions in our certificate of incorporation and under
    Delaware law may prevent or frustrate attempts by our
    stockholders to change our management and hinder efforts to
    acquire a controlling interest in us.
Provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable,
including transactions in which you might otherwise receive a
premium for your shares. These provisions may also
19
Table of Contents
prevent or frustrate attempts by our stockholders to replace or
remove our management. These provisions include:
•
a classified board of directors;
•
limitations on the removal of directors;
•
advance notice requirements for stockholder proposals and
    nominations;
•
the inability of stockholders to act by written consent or to
    call special meetings; and
•
the ability of our board of directors to designate the terms of
    and issue new series of preferred stock without stockholder
    approval.
The affirmative vote of the holders of at least
66
2
/
3
%
of our shares of capital stock entitled to vote is necessary to
amend or repeal the above provisions of our certificate of
incorporation. In addition, absent approval of our board of
directors, our bylaws may only be amended or repealed by the
affirmative vote of the holders of at least
66
2
/
3
%
of our shares of capital stock entitled to vote.
In addition, Section 203 of the Delaware General
Corporation Law prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person who, together with its
affiliates, owns or within the last three years has owned 15% of
our voting stock, for a period of three years after the date of
the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner. Accordingly, Section 203 may discourage,
delay or prevent a change in control of our company.
If you purchase shares of our common stock in this
    offering, you will suffer immediate and substantial dilution of
    your investment.
Purchasers of common stock in this offering will pay a price per
share that substantially exceeds the per share value of our
tangible assets after subtracting our liabilities and the per
share price paid by our existing stockholders and by persons who
exercise currently outstanding options to acquire our common
stock. Accordingly, assuming an initial public offering price of
$          per
share, you will experience 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 at the assumed initial public offering price. In
addition, purchasers of 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 our common stock outstanding after this offering.
An active trading market for our common stock may not
    develop.
Prior to this offering, there has been no public market for our
common stock. Although we expect that our common stock will have
been approved for quotation on the Nasdaq National Market, an
active trading market for our shares may never develop or be
sustained following this offering. The initial public offering
price for our common stock will be determined through
negotiations with the underwriters. This initial public offering
price may vary from the market price of our common stock after
the offering. Investors may not be able to sell their common
stock at or above the initial public offering price.
If our stock price is volatile, purchasers of our common
    stock could incur substantial losses.
Our stock price is likely to be volatile. The stock market in
general and the market for pharmaceutical companies in
particular have experienced extreme volatility that has often
been unrelated to the operating performance of particular
companies. As a result of this volatility, investors may not be
able to sell their common stock at or above the initial public
offering price. The market price for our common stock may be
influenced by many factors, including:
•
developments by our competitors;
•
the regulatory status of Mucinex SE, Mucinex DM and
    our other potential products;
20
Table of Contents
•
failure of any of our product candidates, if approved, to
    achieve commercial success;
•
regulatory developments in the United States;
•
developments or disputes concerning patents or other proprietary
    rights;
•
our ability to manufacture products to commercial standards;
•
litigation;
•
the departure of key personnel;
•
future sales of our common stock;
•
variations in our financial results or those of companies that
    are perceived to be similar to us;
•
changes in the structure of healthcare payment systems;
•
investors' perceptions of us; and
•
general economic, industry and market conditions.
If there are substantial sales of our common stock, our
    stock price could decline.
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that existing
stockholders might sell shares of common stock, the market price
of our common stock could decline significantly. All of the
shares being sold in this offering will be freely tradable
without restriction or further registration under the federal
securities laws, unless purchased by our "affiliates"
as that term is defined in Rule 144 under the Securities
Act. Substantially all of the remaining shares to be outstanding
upon completion of this offering will be eligible for sale
pursuant to Rule 144 upon the expiration of lock-up
agreements.
Upon completion of this offering, holders of an aggregate of
approximately            shares
of common stock will have rights to require us to register these
shares of common stock with the Securities and Exchange
Commission. If we register their shares of common stock
following the expiration of the lock-up agreements, they can
sell those shares in the public market.
Promptly following this offering, we intend to register
approximately            shares
of common stock that are authorized for issuance under our stock
plans. As of February 28, 2005, 5,113,411 shares were
subject to outstanding options, all of which were immediately
exercisable. Once we register the shares authorized for issuance
under our stock plans, they can be freely sold in the public
market upon issuance, subject to our repurchase rights, the
lock-up agreements referred to above and the restrictions
imposed on our affiliates under Rule 144.
We will incur increased costs as a result of being a
    public company and our financial results could be adversely
    affected.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
These costs result from recently adopted corporate governance
requirements, including requirements under the Sarbanes-Oxley
Act of 2002, as well as the rules of the Securities and Exchange
Commission and the National Association of Securities Dealers.
We expect these rules and regulations to increase our legal and
finance compliance costs and to make some activities more
time-consuming and costly. These rules and regulations may make
obtaining director and officer liability insurance more
expensive and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the
same or similar coverage. As a result, attracting and retaining
qualified individuals to serve on our board of directors or as
executive officers may be more difficult. We continue to
evaluate and monitor developments with respect to compliance
with public company requirements and we cannot predict or
estimate the amount or timing of additional costs we may incur.
21
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All
statements, trend analyses and other information contained in
this prospectus relative to markets for our products and trends
in our operations or financial results, as well as other
statements including words such as "may,"
"target," "anticipate," "believe,"
"plan," "estimate," "expect,"
"intend," "project," and other similar
expressions, constitute forward-looking statements. We made
these statements based on our plans and current analyses of our
business and the pharmaceutical industry as a whole. We caution
that these statements may, and often do, vary from actual
results and the differences between these statements and actual
results can be material. Accordingly, we cannot assure you that
actual results will not differ from those expressed or implied
by the forward-looking statements. Factors that could contribute
to these differences include, among other things:
•
general economic conditions and other factors, including our
    ability to sell our products;
•
customer response to new products and marketing initiatives;
•
increased competition in the sale of our pharmaceutical products
    and services and the retention of existing customers;
•
regulatory changes or actions, including those relating to
    regulation of pharmaceutical products; and
•
the other factors discussed under the section entitled
    "Risk Factors" and elsewhere in this prospectus.
You should not place undue reliance on any forward-looking
statement. The forward-looking statements in this prospectus
speak only as of the date of this prospectus. You should assume
that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus. Our
business, financial condition, results of operations, or
prospects may have changed since that date. Neither the delivery
of this prospectus nor the sale of the common shares means that
information contained in this prospectus is correct after the
date of this prospectus. Except as otherwise required by
applicable laws, we undertake no obligation to publicly update
or revise any forward-looking statements, the risk factors or
other information described in this prospectus, whether as a
result of new information, future events, changed circumstances,
or any other reason after the date of this prospectus.
The Private Securities Litigation Reform Act of 1995 and
Section 27A of the Securities Act do not protect any
statements we make in connection with this offering.
22
Table of Contents
USE OF PROCEEDS
We estimate the net proceeds from our sale of
the            shares
of common stock in this offering to be approximately
$           million
at an assumed initial public offering price of
$          per
share, less the underwriting discount and commissions and
estimated offering expenses. We will not receive any proceeds
from the sale of our common stock by the selling stockholders in
this offering. If the underwriters exercise their over-allotment
option in full, we estimate our net proceeds will be
approximately
$            million.
The principal purposes of this offering are to increase our
capitalization and financial flexibility, to provide a public
market for our common stock and to facilitate access to public
capital markets.
We intend to use the net proceeds of this offering as follows:
•
to continue to build the Mucinex brand in the consumer and
    professional market;
•
to fund product development activities; and
•
for general corporate purposes, including working capital needs
    and potential acquisitions or product in-licensing, as described
    below.
We may use a portion of the net proceeds for the acquisition of
businesses, products and technologies, though we have no
agreements or understandings with respect to any acquisition at
this time.
The amounts that we actually expend for these specified purposes
may vary significantly depending on a number of factors,
including changes in our growth strategy, the amount of our
future revenues and expenses and our future cash flow. As a
result, we will retain broad discretion in the allocation of the
net proceeds of this offering and may spend such proceeds for
any purpose, including purposes not presently contemplated.
Pending the uses described above, we may invest the net proceeds
of this offering in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We declared and paid a stock dividend on our capital stock in
October 2000. We currently intend to retain all future earnings
to finance our development efforts, the development of our
proprietary technologies, the in-licensing or acquisition of
specialty pharmaceutical products and trademarks, and the
expansion of our business. We do not intend to declare or pay
cash dividends on our capital stock in the foreseeable future.
Any future determination to pay dividends will be at the
discretion of our board of directors and will depend upon our
results of operations, financial condition, contractual
restrictions, restrictions imposed by applicable law, and other
factors our board of directors deems relevant.
23
Table of Contents
CAPITALIZATION
The following table sets forth our unaudited capitalization as
of December 31, 2004:
•
on an actual basis; and
•
on an as adjusted basis to reflect the conversion of our
    preferred stock into 48,055,162 shares of our common stock
    and sale of
    the            shares
    of common stock offered by us in this offering at an assumed
    initial public offering price of
    $          per
    share after deducting the estimated underwriting discount and
    commissions and offering expenses (as described under "Use
    of Proceeds").
You should read this information together with our financial
statements and the notes to those statements appearing at the
end of this prospectus and the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the "Selected Financial Data"
sections of this prospectus.
December 31, 2004
Actual
As Adjusted
(unaudited)
(in thousands)
Cash, cash equivalents and short-term investments
$
36,720
$
Redeemable convertible preferred stock:
Series A Convertible Preferred Stock, $0.01 par value,
    15,000,000 shares authorized, 12,271,333 shares issued
    and outstanding, actual, no shares issued and outstanding, as
    adjusted
$
72,444
Series B Convertible Preferred Stock, $0.01 par value,
    20,000,000 shares authorized, 16,129,197 shares issued
    and outstanding, actual, no shares issued and outstanding, as
    adjusted
64,517
Series C Convertible Preferred Stock, $0.01 par value,
    15,000,000 shares authorized, 13,814,937 shares issued
    and outstanding, actual, no shares issued and outstanding, as
    adjusted
99,468
Stockholders' (deficit) equity:
Common stock, $0.01 par value; 100,000,000 shares
    authorized, 17,361,537 shares issued and outstanding,
    actual; 100,000,000 shares
    authorized,       shares issued
    and outstanding, as adjusted
174
Additional paid-in capital
(152,518
)
Accumulated deficit
(20,653
)
Total stockholders' (deficit) equity
(172,997
)
Total capitalization
$
63,432
$
The above share data excludes the following:
•
6,923,680 warrants to purchase common stock outstanding as of
    December 31, 2004 at a weighted average exercise price of
    $0.23 per share;
•
2,655,734 warrants to purchase common stock outstanding as of
    December 31, 2004 at an exercise price of $1.60 per
    share; and
•
10,060,023 options to purchase common stock outstanding as of
    December 31, 2004 at a weighted average exercise price of
    $0.56 per share.
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Table of Contents
DILUTION
Our historical net tangible book deficit as of December 31,
2004 was ($177.2) million, or approximately
($10.21) per share based upon 17,361,537 common shares
outstanding. Net tangible book value per share represents the
amount of stockholders' equity less the net book value of
intangible assets divided by the number of shares of common
stock outstanding at that date. Our pro forma net tangible book
value as of December 31, 2004 was approximately
$59.2 million, or $0.90 per common share, based on
65,416,699 shares of common stock outstanding after giving
effect to the conversion of all outstanding preferred stock into
shares of our common stock.
Net tangible book value dilution per share to new investors
represents the difference between the amount per share paid by
purchasers of common stock in this offering and the pro forma
net tangible book value per share of common stock immediately
after completion of this offering. After giving effect to our
sale
of            shares
of common stock in this offering, after deducting the estimated
underwriting discount and commissions and offering expenses,
assuming an initial public offering price of
$          per
share, our pro forma net tangible book value as of
December 31, 2004 would have been
$          per
share. This amount represents an immediate increase in net
tangible book value of
$          per
share to existing stockholders and an immediate dilution in net
tangible book value of
$          per
share to purchasers of our common stock in this offering, as
illustrated in the following table:
Assumed initial public offering price per share
$
Historical net tangible book value per share as of
    December 31, 2004
$
(10.21
)
Increase attributable to conversion of redeemable convertible
    preferred stock
11.11
Pro forma net tangible book value per share as of
    December 31, 2004
$
0.90
Increase per share attributable to new investors
Pro forma net tangible book value per share after giving effect
    to this offering
$
Dilution per share to new investors
$
Assuming the underwriters exercise in full their over-allotment
option, our pro forma net tangible book value at
December 31, 2004 would have been approximately
$          per
share, representing an immediate increase in the pro forma net
tangible book value of
$          per
share to our existing stockholders and an immediate decrease in
net tangible book value of
$          per
share to new investors.
The following table summarizes, on the pro forma basis
discussed, as of December 31, 2004, the differences between
existing stockholders and new investors with respect to the
number of shares of our common stock purchased from us, the
total consideration paid and the average price per share of our
common stock paid by existing stockholders, after giving effect
to the issuance
of            shares
of our common stock in this offering at an assumed offering
price of
$          per
share, after deducting the estimated underwriting discount and
commissions and offering expenses. See "Use of
Proceeds."
Total
Shares Issued
Consideration
Average
Price Per
Number
Percent
Amount
Percent
Share
Existing stockholders
%
$
%
$
New investors
Total
100.0
%
$
100.0
%
$
25
Table of Contents
If the underwriters exercise their over-allotment option in
full, the number of shares held by new investors will be
increased
to           ,
or
approximately           %
of the total number of shares of our common stock outstanding
after this offering.
The discussion and tables above assume no exercise of stock
options or warrants outstanding and no issuance of shares
reserved for issuance under our equity incentive plans. As of
December 31, 2004, there were:
•
6,923,680 shares of common stock issuable upon exercise of
    outstanding warrants with a weighted average exercise price of
    $0.23 per share;
•
2,655,734 shares of common stock issuable upon exercise of
    outstanding warrants with a weighted average exercise price of
    $1.60 per share;
•
10,060,023 shares of common stock issuable upon exercise of
    outstanding options with a weighted average exercise price of
    $0.56 per share; and
•
an additional 1,439,977 shares reserved for future stock
    option grants and purchases under our existing equity
    compensation plans.
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Table of Contents
SELECTED FINANCIAL DATA
The following table presents our selected financial information,
which you should read in conjunction with, and is qualified in
its entirety by reference to, our historical financial
statements, the notes to those statements and
"Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected
financial information set forth below as of June 30, 2004
and 2003 and for the years ended June 30, 2004, 2003 and
2002 has been derived from our audited financial statements
included herein. The selected financial information as of
June 30, 2002, 2001 and 2000 and for the years ended
June 30, 2001 and 2000 have been derived from our audited
financial statements, which are not included in this prospectus.
The selected financial information as of and for the six months
ended December 31, 2004 and 2003 has been derived from
unaudited financial statements, which include all adjustments
consisting of normal recurring accruals that we consider
necessary for a fair presentation of the financial position and
the results of operations for these periods. Historical results
are not indicative of future performance.
Six Months Ended
December 31,
Years Ended June 30,
2004
2003
2004
2003
2002
2001
2000
(unaudited)
(in thousands, except per share amounts)
Statements of Operations Data
Net sales
$
62,021
$
27,074
$
61,295
$
14,038
$
13,755
$
9,996
$
9,964
Cost of goods sold
13,350
5,049
11,928
5,252
4,024
6,134
5,513
Gross margin
48,671
22,025
49,367
8,786
9,731
3,862
4,451
Selling, marketing and administrative(1)
30,768
9,834
23,286
23,310
17,968
12,875
11,119
Product development
3,059
1,719
3,181
4,542
7,419
3,580
2,660
Interest expense
52
1,582
3,403
3,601
—
228
86
Interest income
(294
)
(52
)
(205
)
(29
)
(180
)
—
—
Income/(loss) before income taxes
15,086
8,942
19,702
(22,638
)
(15,476
)
(12,821
)
(9,414
)
Provision/(benefit) for income taxes
5,858
—
(16,124
)
—
—
—
—
Net income/(loss)
9,228
8,942
35,826
(22,638
)
(15,476
)
(12,821
)
(9,414
)
Accretion of preferred stock
(10,953
)
(320
)
(590
)
(627
)
(619
)
(177
)
(49
)
Net (loss)/income applicable to common stockholders
$
(1,725
)
$
8,622
$
35,236
$
(23,265
)
$
(16,095
)
$
(12,998
)
$
(9,463
)
(Loss)/earnings per common share
Basic
$
(0.10
)
$
0.71
$
2.63
$
(2.64
)
$
(1.83
)
$
(1.86
)
$
(1.28
)
Diluted
$
(0.10
)
$
0.38
$
1.43
$
(2.64
)
$
(1.83
)
$
(1.86
)
$
(1.28
)
Pro forma earnings per common share(2)
Basic
$
0.14
$
0.58
Diluted
$
0.12
$
0.49
27
Table of Contents
(1)
Selling, marketing and administrative includes non-cash
    stock-based compensation expense as follows:
Six Months Ended
December 31,
Years Ended June 30,
2004
2003
2004
2003
2002
2001
2000
(unaudited)
(in thousands)
$
179
$
343
$
686
$
880
$
1,292
$
1,256
$
212
(2)
Please see Note 1 to our financial statements for an
    explanation of the method used to compute pro forma earnings per
    common share, basic and diluted, and the number of shares used
    in computing per share amounts.
At June 30,
At December 31,
2004
2004
2003
2002
2001
2000
(unaudited)
(in thousands)
Balance Sheet Data
Cash, cash equivalents and short-term investments
$
36,720
$
43,391
$
9,405
$
7,272
$
1,507
$
166
Working capital
55,106
47,151
5,230
6,766
(3,155
)
1,245
Total assets
85,977
71,035
20,382
17,350
9,784
9,801
Long-term liabilities
2,516
2,731
14,873
—
—
3,400
Redeemable convertible preferred stock
236,429
110,851
60,647
68,851
36,620
19,906
Accumulated deficit
(20,653
)
(29,881
)
(65,707
)
(43,069
)
(27,593
)
(14,772
)
Total stockholders' deficit
$
(172,997
)
$
(56,997
)
$
(64,169
)
$
(56,517
)
$
(34,721
)
$
(16,180
)
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Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with our
financial statements and related notes appearing elsewhere in
this prospectus. Data presented as of December 31, 2004 and
2003 and for the interim periods then ended is based on our
unaudited financial statements presented elsewhere in this
prospectus. Some of the information contained in this discussion
and analysis or set forth elsewhere in this prospectus,
including information with respect to our plans and strategy for
our business and related financing, includes forward-looking
statements that involve risks and uncertainties. You should
review the section entitled "Risk Factors" section of
this prospectus for a discussion of important factors that could
cause our actual results to differ materially from the results
described in or implied by the forward-looking statements
contained in the following discussion and analysis.
Overview
We are a specialty pharmaceutical company focused on late-stage
development, commercialization and marketing of OTC and
prescription pharmaceuticals for the treatment of respiratory
disorders. We currently market two products, Mucinex SE and
Mucinex DM.
Mucinex SE.
Mucinex SE is a long-acting,
single-ingredient guaifenesin OTC product and the only
long-acting guaifenesin product approved by the FDA. The FDA
approved Mucinex SE in July 2002.
Mucinex DM.
Mucinex DM is an OTC product containing
long-acting guaifenesin and the cough suppressant
dextromethorphan, and is the only FDA-approved, long-acting
guaifenesin and dextromethorphan combination product. The FDA
approved Mucinex DM in April 2004.
Future Products.
We have four additional products that
have been approved by the FDA that we intend to market in the
future: Mucinex D, an OTC product containing long-acting
guaifenesin and the decongestant, pseudoephedrine; a maximum
strength long-acting, single-ingredient guaifenesin OTC product
(under the Humibid brand name); a maximum strength OTC
combination product containing long-acting guaifenesin and
dextromethorphan; and a maximum strength OTC combination product
containing long-acting guaifenesin and pseudoephedrine. Like
Mucinex SE and Mucinex DM, these additional products
are the only FDA-approved products of their kind.
Revenue Growth.
Our net revenues have grown from
$13.8 million for the year ended June 30, 2002 to
$14.0 million and $61.3 million for the years ended
June 30, 2003 and 2004, respectively. Our net revenues for
the six months ended December 31, 2003 and 2004 were
$27.1 million and $62.0 million, respectively. Our
revenue growth has been primarily driven by Mucinex SE sales
following its launch in July 2002 and Mucinex DM sales following
its launch in August 2004. We believe that the key factors
underlying the growth of Mucinex SE and Mucinex DM revenues
include:
•
The FDA's removal of competitive long-acting,
    single-ingredient guaifenesin prescription products in November
    2003.
This removal resulted in Mucinex SE being the only
    long-acting, single-ingredient guaifenesin product available in
    the United States. Based on data from IMS
    Health–NPA
TM
,
    we estimate that, for the 12 months ended June 30,
    2003, there were approximately 10.5 million prescriptions
    filled for long-acting, single-ingredient guaifenesin products.
    After November 2003, we believe that a majority of prescriptions
    written for long-acting, single-ingredient guaifenesin resulted
    in OTC sales of our Mucinex SE product.
•
Our professional marketing efforts to physicians, pharmacists
    and other healthcare professionals.
Our professional sales
    force targets high-prescribers of long-acting guaifenesin
    products and encourages them to recommend Mucinex SE and Mucinex
    DM to their patients. Our professional sales force also educates
    physicians, pharmacists and other healthcare professionals about
    the benefits of long-acting guaifenesin. In December 2004, we
    expanded our professional sales force from 50 to 100 sales
    representatives.
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•
Expansion of our trade sales department and trade development
    efforts.
Our trade sales force calls on national and
    regional retail accounts and wholesale distribution companies.
    The primary focus of our trade sales force is to maximize our
    shelf presence at retail drug, food and mass merchandise stores
    to support the efforts of our professional sales representatives
    and consumer advertising campaign. Between December 2003 and
    December 2004, we grew our trade sales force function from one
    to six professionals.
•
Consumer Advertising Campaign.
Prior to the FDA's
    approval of Mucinex SE as an OTC drug, long-acting guaifenesin
    and combination products were available only by prescription. We
    launched our consumer advertising campaign in November 2004, and
    our strategy is to educate customers about the unique benefits
    of Mucinex to encourage trial of our products.
Results of Operations.
We commenced operations in 1997,
and as of June 30, 2003, we had an accumulated deficit of
$65.7 million. During the fiscal year ended June 30,
2004, we reported net income of $35.8 million, which
included an income tax benefit of approximately
$16.1 million related primarily to the reversal of the
valuation allowance that had been recorded against the deferred
tax asset resulting from accumulated net operating losses.
During the six months ended December 31, 2004, we reported
net income of $9.2 million, which reduced the accumulated
deficit at December 31, 2004 to $20.7 million.
Seasonality.
Retail sales of our products have
historically been concentrated between October 1 and
March 31 due to the prevalence of respiratory congestion
and cough during the cough, cold and flu season. We believe
retail sales of our products to consumers generally occur
approximately three months following our shipment of products to
trade customers and as a result, we typically recognize revenue
in the quarter prior to retail sales of our products.
Future Growth.
We believe that our future growth will be
driven by professional and consumer marketing efforts to create
increased awareness of the Mucinex brand and the benefits of
long-acting guaifenesin and new product launches such as Mucinex
D and our maximum strength products. Additionally, the FDA may
take action to remove from the market the current long-acting
guaifenesin products similar to Mucinex DM and Mucinex D,
which could have a beneficial impact on our business. We plan to
continue to spend significant amounts on the commercialization
of our current products, the continuing development of our
pipeline products and the in-licensing or acquisition of new
product candidates. Our future profitability is dependent upon
the successful commercialization of Mucinex SE and
Mucinex DM and the introduction of new products such as
Mucinex D and Humibid.
Critical Accounting Policies and Estimates
Our financial statements are presented on the basis of
accounting principles that are generally accepted in the United
States. We have taken into consideration all professional
accounting standards that are effective as of the date of these
financial statements. Included within these policies are our
"critical accounting policies." Critical accounting
policies are those policies that are most important to the
preparation of our financial statements and require
management's most subjective and complex judgments due to
the need to make estimates about matters that are inherently
uncertain. Although we believe that our estimates and
assumptions are reasonable, actual results may differ
significantly from these estimates. Changes in estimates and
assumptions based upon actual results may have a material impact
on our results of operations and financial condition. Our
critical accounting policies are described in detail below.
While our significant accounting policies are more fully
described in Note 1 to our financial statements contained
in this prospectus, we believe that the following accounting
policies relating to revenue recognition, sales returns and
allowances, cost of goods sold (Cardinal Health profit share),
income taxes, and stock-based compensation charges are most
critical in fully understanding and evaluating our reported
financial results.
Revenue Recognition.
We recognize revenue when title and
risk of loss have transferred to the customer, when estimated
provisions for product returns, rebates, chargebacks, and other
sales allowances
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are reasonably determinable and when collection is reasonably
assured. Accruals for these provisions are presented in the
financial statements as reductions to sales.
Sales Returns and Allowances.
When we sell our products,
we reduce the amount of revenue recognized from such sale by an
estimate of future product returns and other sales allowances.
Other sales allowances include cash discounts, rebates,
including Medicaid rebates, chargebacks, sales incentives, and
royalties relating to products sold in the current period.
Factors that are considered in our estimates of future product
returns include an estimate of the amount of product in the
trade channel, competitive products, the remaining time to
expiration of the product, and the historical rate of returns.
Consistent with industry practice, we maintain a return policy
that allows our customers to return product within a specified
period prior to and subsequent to the expiration date. Factors
that are considered in our estimates regarding other sales
allowances include historical payment experience in relationship
to revenues, estimated customer inventory levels and current
contract prices and terms with both direct and indirect
customers and product royalty rates. If actual future payments
for product returns and other sales allowances exceed the
estimates we made at the time of sale, our financial position,
results of operations and cash flow would be negatively impacted.
Cardinal Health Profit Share.
In April 2004, we sold
substantially all of our manufacturing assets, raw materials and
in-process inventory located in Fort Worth, Texas to
Cardinal Health. Pursuant to our supply agreement with Cardinal
Health, Cardinal Health manufactures and supplies all of our
existing drug products. Under this supply agreement, Cardinal
Health is required to segregate direct manufacturing costs from
indirect manufacturing costs. As finished goods are completed
and shipped to a warehouse we designate, Cardinal Health bills
us for the actual direct manufacturing costs incurred plus a
mark-up. This mark-up is merely provided for interim billing
purposes and the actual amount payable to Cardinal Health is
calculated at the end of each calendar quarter under a profit
sharing formula. Profit for this purpose is calculated as net
sales less the actual direct manufacturing cost of products sold
during the calendar quarter and less freight and other logistics
costs. The resulting profit is subject to profit sharing rates
that decline as the total value of this profit increases. At the
end of each calendar quarter, a reconciliation is completed and
a billing adjustment is made to the extent that the actual
profit share differs from the total mark-up paid to Cardinal
Health during the calendar quarter.
The accounting policy with regard to this arrangement is to
record the actual direct manufacturing cost and mark-up billed
by Cardinal Health as inventory. Each month, as product is sold,
the actual direct manufacturing cost plus an estimate of the
profit share amount earned by Cardinal Health is charged to cost
of sales. The estimated profit share amount considers for each
contract year (i) our projected net product sales and gross
profit, (ii) the projected profit share and (iii) the
contractual minimum profit share amount.
Income Taxes.
Income taxes are accounted for in
accordance with Statement of Financial Accounting Standards, or
SFAS, No. 109,
Accounting for Income Taxes
. Under
this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
years in which the differences are expected to reverse. Our net
deferred tax assets relate primarily to net operating loss
carryforwards, or NOL, research credits and sales reserves. In
assessing the reliability of deferred tax assets, we consider
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. This assessment
requires significant judgment and estimates. The ultimate
realization of the deferred tax assets is dependent upon the
generation of future taxable income during the period in which
those temporary differences become deductible. We consider our
history of losses, scheduled reversal of deferred tax assets and
liabilities and projected future taxable income over the periods
in which the deferred tax items are deductible. In addition,
Internal Revenue Code Sections 382 and 383 contain
provisions that may limit the NOL available to be used in any
given year upon the occurrence of certain events, including
significant changes in ownership interest. During fiscal year
2004, we utilized approximately 50% of our NOLs. Given this
utilization, as well as projections for taxable income during
fiscal 2005, the entire valuation allowance was reversed at
June 30, 2004.
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Stock-Based Compensation.
We account for stock-based
compensation in accordance with the fair value recognition
provisions of SFAS No. 123,
Accounting for
Stock-Based Compensation
, as amended by
SFAS No. 148,
Accounting for Stock-Based
Compensation – Transition and Disclosure
, or
SFAS 123, for stock-based employee compensation. We use the
graded-vesting methodology to record the stock-based
compensation expense over the vesting period, which generally
ranges from three to five years. This methodology results in a
greater amount of expense recognized towards the beginning of
the vesting period as opposed to the straight-line method.
Because subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing
methods do not necessarily provide a reliable single measure of
the fair value of our stock options.
Accretion of Preferred Stock.
We adjust the carrying
value of the redeemable convertible Series A Preferred
Stock, or Series A Preferred Stock, the redeemable
convertible Series B Preferred Stock, or Series B
Preferred Stock, and the redeemable convertible Series C
Preferred Stock, or Series C Preferred Stock, to
liquidation value. Such accretion to liquidation value is
included in the calculation of net income applicable to common
stockholders. For Series A and Series B Preferred
Stock, the holder could receive, upon redemption, the fair
market value of the preferred stock. For Series C Preferred
Stock, the holder could receive, upon redemption, the fair
market value of the preferred stock if such value exceeds
liquidation value. To the extent that the fair market value is
greater than the accreted face value (for Series A and B
Preferred Stock) or liquidation value (for Series C
Preferred Stock) at the balance sheet date, the preferred stock
is adjusted to reflect the fair market value with the offset
charged to additional paid-in capital in stockholders'
equity.
We incurred approximately $870 and $1,196 of issuance costs in
connection with the issuance of Series A and B Preferred
Stock, respectively. Such costs have been recorded as a
reduction of the carrying amount of the preferred stock and are
being accreted through a charge to additional paid-in capital up
to the original redemption date, using the effective interest
method and are included in net income applicable to common
stockholders. There were no issuance costs associated with the
Series C Preferred Stock.
Operating Expenses
Product Development.
Our product development expenses
have historically consisted of formulation and analytical
development work with existing and well established drugs and
pharmaceutical ingredients, the development of scale-up and
manufacturing data and stability programs, human pharmacokinetic
studies to establish bioavailability and bioequivalence data for
our products versus reference drugs, as well as the preparation
and filing of NDAs. Further, we invest in the prosecution of
patents related to our products and in clinical research studies
in support of our products.
Generally, our formulation, chemistry and analytical
manufacturing controls and stability work has been performed
utilizing our own employees and since April 2004, in
cooperation with Cardinal Health. Product development expenses
include salary and benefits, raw materials and supplies,
facilities, depreciation, and other allocated expenses
associated with the performance of the above work and functions.
Pharmacokinetic studies, clinical trials and certain support
functions in preparing protocols, reports and other regulatory
documents are performed by scientific consultants and third
party contract research organizations.
Selling, Marketing and Administrative.
Selling, marketing
and administrative expenses include professional sales and
marketing, consumer marketing, trade sales and distribution
activities, and administrative expenses.
Our professional selling and marketing expenses are comprised
primarily of (i) our professional sales representatives and
the related management function, which includes salary,
commission, benefits (including stock-based compensation), and
business related expenses, (ii) physician samples,
(iii) sales force training, (iv) sales force
information technology, and (v) market research and
advertising agency costs.
Our consumer marketing expenses are comprised of costs related
to (i) media, including television, radio and print
advertising, (ii) market research, (iii) website
operations, (iv) commercial
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production, and (v) internal management personnel.
Substantially all of the costs associated with our consumer
marketing expenses are paid to an outside advertising agency.
Our trade sales and distribution expenses are primarily
comprised of costs associated with our national and regional
trade sales personnel and their related territory operations and
outsourced warehouse and shipping operations paid to Cardinal
Health.
Administrative expenses include salaries and benefits (including
stock-based compensation), professional fees and facility costs.
We estimate that our administrative expenses will increase to
support our growing development, sales and marketing efforts. We
also expect to incur additional costs associated with operating
as a public company.
Results of Operations
Six Months Ended December 31, 2004 Compared to Six
    Months Ended December 31, 2003
Net Sales.
Net sales increased by $34.9 million to
$62.0 million for the six months ended December 31,
2004, as compared to $27.1 million for the six months ended
December 31, 2003. The increase in net sales during the six
months ended December 31, 2004 is primarily due to
(i) Mucinex SE being the exclusive long-acting,
single-ingredient guaifenesin product available in the United
States for the full six months ended December 31, 2004, as
compared to only one month during the six-month period ended
December 31, 2003, (ii) the launch of our consumer
advertising campaign in November 2004 and (iii) the launch
of Mucinex DM, which was partially offset by a reduction in
other product sales. Other products consist of the AlleRx®
and Aquatab product lines, which were discontinued in February
2005 and August 2004, respectively.
The following table sets forth our net sales for the six months
ended December 31, 2004 and December 31, 2003.
Six Months Ended December 31,
Product
2004
2003
Increase/(Decrease)
(in thousands)
Mucinex SE
$
47,276
$
23,165
$
24,111
Mucinex DM
11,599
—
11,599
Other products
3,146
3,909
(763
)
Net Sales
$
62,021
$
27,074
$
34,947
Cost of Goods Sold.
Cost of goods sold increased
$8.3 million to $13.4 million for the six months ended
December 31, 2004, as compared to $5.0 million for the
six months ended December 31, 2003. Cost of goods sold
increased in dollar terms primarily as a result of the increase
in Mucinex SE sales and the launch of Mucinex DM. As a
percentage of net sales, cost of goods sold during the six
months ended December 31, 2004 represented 22%, as compared
to 19% for the same period in 2003. Cost of goods sold increased
as a percentage of net sales primarily as a result of the
outsourcing of product manufacturing to Cardinal Health.
Selling, Marketing and Administrative.
Selling, marketing
and administrative expenses increased $20.9 million to
$30.8 million for the six months ended December 31,
2004, as compared to $9.8 million for the six months ended
December 31, 2003. The increase during the six months ended
December 31, 2004 is primarily due to
(i) approximately $13.5 million of spending on the
consumer advertising campaign, (ii) approximately
$1.1 million of additional expense related to distribution
and shipping on the increased volume, (iii) approximately
$6.1 million associated with various sales and marketing
programs such as the hiring of 50 additional sales
representatives, professional marketing and market research
expenses, expansion of the trade sales department, sales
training and meetings, and implementation of a sales force
automation system for our 100-person sales force, and
(iv) $1.4 million of incremental general and
administrative expenses primarily related to new headcount,
information technology and performance bonuses. Stock-based
compensation is reflected within selling, marketing and
administrative expenses and
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decreased by $164,000, or 48%, to $179,000 for the six months
ended December 31, 2004, as compared to $343,000 reported
during the six months ended December 31, 2003. The decrease
is primarily due to a lower number of stock options granted
during the six months ended December 31, 2004, as compared
to the same period ended December 31, 2003 and a reduction
in the minimum value per stock option used in calculating the
stock compensation expense.
Product Development.
Product development expenses
increased by $1.3 million, or 78%, to $3.1 million
during the six months ended December 31, 2004, as compared
to $1.7 million for the six months ended December 31,
2003. The increase for the six months ended December 31,
2004 is primarily attributable to continued development of our
Mucinex line extensions and other development projects.
Interest Expense.
Interest expense decreased by
$1.5 million, or 97%, to $52,000 during the six months
ended December 31, 2004, as compared to $1.6 million
for the six months ended December 31, 2003. The decrease in
interest expense is a result of our 8% Convertible Secured
Promissory Notes due 2005, or the 8% Convertible Notes, being
converted into our Series C Preferred Stock on
June 30, 2004. The 8% Convertible Notes earned interest at
the rate of 8% annually and also required us to record non-cash
interest expense for the beneficial conversion feature and the
warrants to purchase common stock that were granted in
connection with the issuance of the 8% Convertible Notes.
Interest Income.
Interest income increased $242,000 to
$294,000 during the six months ended December 31, 2004, as
compared to $52,000 for the six months ended December 31,
2003. The increase during the six months ended December 31,
2004 is primarily due to our average cash balance of
approximately $35.1 million during the six months ended
December 31, 2004, as compared to approximately
$10.9 million during the six months ended December 31,
2003.
Income Taxes.
Income tax expense for the six months ended
December 31, 2004 was $5.9 million. We had no income
tax expense for the six months ended December 31, 2003. Our
effective tax rate for the six months ended December 31,
2004 was 39% compared to 0% for the six months ended
December 31, 2003. At December 31, 2003, we did not
believe that we had a sufficient earnings history to reduce the
valuation allowance that had been recorded against our deferred
tax assets that had accumulated primarily as a result of net
operating losses for income tax purposes. At June 30, 2004,
we had approximately $25.7 million of net NOL that is
subject to annual limitations due to the ownership change
limitations provided by the Internal Revenue Code.
Accretion of Preferred Stock.
Accretion of our redeemable
convertible preferred stock for the six months ended
December 31, 2004 was $11.0 million, as compared to
$320,000 for the six months ended December 31, 2003. The
$10.7 million increase in the six months ended
December 31, 2004 reflects the accretion to liquidation
value of the Series C Preferred Stock. Upon the closing of
this offering, our redeemable convertible preferred stock will
automatically convert into shares of common stock and, as a
result, there will be no further accretion.
Fiscal Year Ended June 30, 2004 Compared to Fiscal Year
    Ended June 30, 2003
Net Sales.
Net sales increased by $47.3 million to
$61.3 million during the fiscal year ended June 30,
2004, as compared to $14.0 million during the fiscal year
ended June 30, 2003. During fiscal year 2004,
Mucinex SE net sales increased approximately
$48.4 million to $52.9 million primarily as a result
of our exclusive market position in the long-acting,
single-ingredient guaifenesin market and the promotional efforts
of our professional sales force. Our other products, which have
been discontinued, decreased primarily as a result of our former
Aquatab product line being negatively impacted by generic
competition.
Cost of Goods Sold.
Cost of goods sold increased by
$6.7 million to $11.9 million during the fiscal year
ended June 30, 2004, as compared to $5.3 million
during the fiscal year ended June 30, 2003. The increase in
cost of goods sold from fiscal year 2003 to fiscal year 2004
primarily resulted from an increase in our unit sales of
Mucinex SE. As a percentage of net sales, cost of goods
sold decreased to 20% during the fiscal year ended June 30,
2004 from 37% during the fiscal year ended June 30, 2003,
primarily as a result of greater manufacturing efficiencies
related to increased production and the lack of a
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one-time inventory charge of approximately $1.0 million
recorded during fiscal year 2003. During fiscal year 2002, we
manufactured Mucinex SE inventory in anticipation of the
FDA's removal of the competitive unapproved products.
However, as the FDA granted the competitive manufacturers an
effective seventeen-month grace period, allowing them to remain
on the market until November 30, 2003, approximately
$1.0 million, or approximately 20 million tablets, of
Mucinex SE inventory expired and was written off in fiscal
2003.
Selling, Marketing and Administrative.
Selling, marketing
and administrative expenses were essentially flat at
$23.3 million during the fiscal year ended June 30,
2004 and 2003. This result is primarily due to:
(i) employing ten fewer sales representatives during fiscal
2004 as compared to fiscal 2003; (ii) a reduction in
Mucinex SE sample expense during fiscal 2004 due to focusing our
production efforts on saleable trade product; and
(iii) settlement of a lawsuit with CellTech
Pharmaceuticals, Inc., or CellTech, during fiscal year 2003.
These expense reductions were offset by increases related to:
(i) the relocation of our headquarters from Texas to New
Jersey during April 2004; (ii) accrued management bonuses
due to meeting operating objectives; and (iii) increased
headcount in administration and trade sales departments.
Stock-based compensation is reflected within selling, marketing
and administrative expenses and decreased by $194,000, or 22%,
to $686,000 for the fiscal year ended June 30, 2004, as
compared to $880,000 for the fiscal year 2003. This decrease is
primarily due to the reduction in the minimum value per option
used in calculating the stock compensation expense for fiscal
2004.
Product Development.
Product development expenses
decreased $1.4 million, or 30%, to $3.2 million during
the fiscal year ended June 30, 2004, as compared to
$4.5 million for the fiscal year ended June 30, 2003.
This decrease is primarily the result of a reduction in expenses
associated with the later stages of development for Mucinex D
and Mucinex DM during fiscal 2004, as compared to the completion
of the clinical costs and NDA preparation costs for such
products during fiscal 2003.
Interest Expense.
Interest expense decreased by $198,000,
or 5%, to $3.4 million during the fiscal year ended
June 30, 2004, as compared to $3.6 million for the
fiscal year ended June 30, 2003. Fiscal year 2004 interest
expense included approximately $1.7 million of stated
interest related to the 8% Convertible Notes that were converted
to Series C Preferred Stock on June 30, 2004 and
approximately $1.4 million of non-cash debt discount
amortization related to the beneficial conversion feature and
the warrants to purchase common stock that were issued in
connection with the 8% Convertible Notes. Fiscal year 2003
interest expense was comprised of approximately $340,000 of
stated interest related to the 8% Convertible Notes and our 10%
Convertible Promissory Notes due 2003, or the Bridge Notes, and
approximately $3.2 million of non-cash debt discount
amortization related to the warrants issued to purchase common
stock in connection with the Bridge Notes and the 8% Convertible
Notes.
Interest Income.
Interest income increased by $176,000 to
$205,000 for the fiscal year ended June 30, 2004, as
compared to $29,000 for the fiscal year ended June 30,
2003. This is primarily a result of our average cash balance
increasing by approximately $18.1 million to approximately
$26.4 million during fiscal year 2004, as compared to
$8.3 million during fiscal year 2003. Our average cash
balance increased primarily as a result of the funding under the
8% Convertible Notes between May and August 2003 as well as our
improved profitability during fiscal year 2004, as compared to a
net loss in fiscal year 2003.
Income Taxes.
Income tax benefit for the fiscal year
ended June 30, 2004 was approximately $16.1 million
and resulted in an effective income tax rate of (82%). At
June 30, 2004, after having achieved three consecutive
quarters of before-tax profit and based on financial projections
for fiscal year 2005, the valuation allowance that offset our
deferred tax asset was eliminated. At June 30, 2004, our
NOL of approximately $25.7 million was subject to annual
limitations due to the ownership change limitations provided by
the Internal Revenue Code. At June 30, 2003, we had a NOL
of approximately $51.7 million.
Accretion of Preferred Stock.
Accretion of our redeemable
convertible preferred stock for the year ended June 30,
2004 was $590,000, as compared to $627,000 for the year ended
June 30, 2003. The $37,000 decrease in the year ended
June 30, 2004 reflects the timing of the accretion of
issuance costs on
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the redeemable convertible preferred stock. Upon the closing of
this offering, our redeemable convertible preferred stock will
automatically convert into shares of common stock and as a
result, there will be no further accretion.
Fiscal Year Ended June 30, 2003 Compared to Fiscal Year
    Ended June 30, 2002
Net Sales.
Net sales increased by $283,000, or 2%, to
$14.0 million during the fiscal year ended June 30,
2003, as compared to $13.8 million for the fiscal year
ended June 30, 2002. This increase primarily resulted from
the launch of Mucinex SE, which was substantially offset by
the reduction in sales of our other products due to generic
competition on the Aquatab line of products. During July 2002,
we launched Mucinex SE and reported $4.5 million of net
sales for fiscal year 2003. We believe Mucinex SE sales were
limited due to the unapproved prescription products remaining in
the marketplace for all of fiscal year 2003. Net sales of our
other products, which as of February 15, 2005 have been
discontinued, decreased by $4.2 million, or 31%, to
$9.5 million for the fiscal year ended June 30, 2003,
as compared to $13.8 million for the fiscal year ended
June 30, 2002. The decrease was primarily the result of
increased generic competition on our former Aquatab product line.
Cost of Goods Sold.
Cost of goods sold increased by
$1.2 million, or 31%, to $5.3 million during the
fiscal year ended June 30, 2003, as compared to
$4.0 million during the fiscal year ended June 30,
2002, despite an increase in sales of only $283,000. The
increase primarily resulted from the one-time charge of
approximately $1.0 million related to expired
Mucinex SE inventory that was expensed as cost of goods
sold during fiscal year 2003.
Selling, Marketing and Administrative.
Selling, marketing
and administrative expenses increased by $5.3 million, or
30%, to $23.3 million during the fiscal year ended
June 30, 2003, as compared to $18.0 million during the
fiscal year ended June 30, 2002. This increase primarily
resulted from employing approximately 60 professional sales
representatives during fiscal year 2003, as compared to
approximately 40 professional sales representatives during
fiscal year 2002 and incurring an approximate incremental
$1.2 million of physician sample expense related to the
launch of Mucinex SE. In addition, during fiscal year 2003, our
administrative expenses increased as a result of an accrued
charge of $2.0 million in connection with the CellTech
litigation. Stock-based compensation is reflected within
selling, marketing and administrative expenses. We recorded
stock-based compensation of $880,000 and $1.3 million
during the fiscal years ended June 30, 2003, and 2002,
respectively. This decrease was primarily due to the reduction
in the minimum value per stock option used in calculating the
stock compensation expense for fiscal 2003.
Product Development.
Product development expenses
decreased by approximately $2.9 million, or 39%, to
$4.5 million during the fiscal year ended June 30,
2003, as compared to $7.4 million during the fiscal year
ended June 30, 2002. This decrease is primarily
attributable to our fiscal year 2003 expenses being primarily
related to completion of the clinical work and NDA preparation
fees for Mucinex D, as compared to the more comprehensive and
expensive formulation, development and clinical work that was
performed for these products during fiscal year 2002.
Interest Expense.
Interest expense for the fiscal year
ended June 30, 2003 totaled $3.6 million and was
comprised of $340,000 of stated interest related to the 8%
Convertible Notes and the Bridge Notes and approximately
$3.2 million of non-cash debt discount amortization related
to the beneficial conversion feature and the warrants issued to
purchase common stock in connection with the Bridge Notes and
the 8% Convertible Notes. We had no interest expense during
fiscal year 2002.
Interest Income.
Interest income decreased $151,000 to
$29,000 for the fiscal year ended June 30, 2003, as
compared to $180,000 for the fiscal year ended June 30,
2002. The decrease is primarily due to a reduction in our
average cash balances available for investing during fiscal year
2003, as compared to fiscal year 2002. During fiscal year 2002,
our cash balances were higher primarily as a result of our
$25.8 million Series B Preferred Stock financing that
closed in July 2001.
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Accretion of Preferred Stock.
Accretion of our redeemable
convertible preferred stock for the year ended June 30,
2003 was $627,000, as compared to $619,000 for the year ended
June 30, 2002. The $8,000 decrease in the year ended
June 30, 2003 reflects the timing of the accretion of
issuance costs on the redeemable convertible preferred stock at
June 30, 2003. Upon the closing of this offering, our
redeemable convertible preferred stock will automatically
convert into shares of common stock and as a result, there will
be no further accretion.
Liquidity and Capital Resources
From inception through June 30, 2003, we financed our
operations primarily through the net proceeds from private
placements of common stock, redeemable convertible preferred
stock, notes convertible into redeemable convertible preferred
stock, a revolving bank line of credit, and revenues generated
by our products. Total funding we received under sales of equity
securities and convertible notes, from inception to
December 31, 2004, totaled approximately
$78.0 million. Beginning with the quarter ended
December 31, 2003, we have reported positive before tax
profit in each quarter.
As of December 31, 2004, we had approximately
$36.7 million of cash, cash equivalents and short-term
investments and working capital of $55.1 million, which
includes a current deferred tax asset of $7.2 million
related primarily to the future benefit of our net operating
losses for tax purposes.
In addition to the equity funding described above, we also had
access to a revolving line of credit with Silicon Valley Bank
that ranged from $3.0 million to $5.0 million between
2001 and November 2004. As of December 31, 2004, our
revolving line of credit with Silicon Valley Bank has expired.
We have not had any outstanding balances under the revolving
line of credit since May 2003.
We expect to increase our selling, marketing and administrative,
and our product development expenses. We anticipate our selling
and marketing expenses to increase as we seek to
(i) continue to switch long-acting guaifenesin and
combination prescription products into OTC sales of Mucinex
products, (ii) expand the market for long-acting
guaifenesin and combination products and (iii) increase our
share of the OTC cough, cold, allergy, and sinus markets.
Therefore, we believe that we may need to increase our number of
professional sales representatives beyond the current 100 and
increase our consumer advertising spending. We anticipate that
our administrative expenses will increase to support our current
growth plans and position as a public company. Our product
development expenses will likely increase as a result of our
current plans to (i) expand the Mucinex product line with
OTC and prescription line extensions and (ii) in-license or
acquire specialty pharmaceutical respiratory products and
trademarks that may require additional development expenditures
to achieve FDA marketing approval. We believe that our cash
outflows related to acquiring products and entering into
licensing agreements may increase as we pursue our product
portfolio expansion initiative. Additionally, if sales of our
current products continue to increase and/or we increase the
number of products in our portfolio, we may find it necessary to
consider alternative manufacturing capabilities, which may
include the acquisition of manufacturing facilities and
equipment and participating in capital expenditures under
contract manufacturing relationships.
We believe the proceeds from this offering, together with our
cash and cash equivalents, will be sufficient to meet our
anticipated operating needs for at least the
next                years.
We continually evaluate new opportunities for late-stage or
currently-marketed complementary product candidates and, if and
when appropriate, intend to pursue such opportunities through
the acquisitions of companies, products or technologies and our
own development activities. Our ability to execute on such
opportunities in some circumstances may be dependent, in part,
upon our ability to raise additional capital on commercially
reasonable terms. There can be no assurance that funds from
these sources will be available when needed or on terms
favorable to us or our stockholders. If additional funds are
raised by issuing equity securities, the percentage ownership of
our stockholders will be reduced, stockholders may experience
additional dilution or such equity securities may provide for
rights, preferences or privileges senior to those of the holders
of our common stock.
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Table of Contents
Cash Flows
Six months ended December 31, 2004 compared to six
months ended December 31, 2003.
Net cash used in
operating activities was $5.3 million and $1.6 million
for the six months ended December 31, 2004 and 2003,
respectively. The increase in net cash used in operations during
the six months ended December 31, 2004 was primarily due to
a prepayment of our consumer advertising expenses prior to
December 31, 2004, which was partially offset by an
increase in accounts payable and a reduction to the deferred tax
assets.
Net cash used in investing activities was $11.5 million and
$54,000 for the six months ended December 31, 2004 and
2003, respectively. The increase in net cash used in investing
activities was primarily due to the purchase of short-term
investments and for leasehold improvements and information
technology equipment installed at our new corporate headquarters
located in Chester, New Jersey.
Net cash provided by financing activities was $171,000 and
$4.6 million during the six months ended December 31,
2004 and 2003, respectively. During the six months ended
December 31, 2003, we received $4.6 million of cash
from issuances of the 8% Convertible Notes. During the six
months ended December 31, 2004, the proceeds from financing
activities were limited to the exercise of options and warrants
to purchase common stock.
Fiscal Year ended June 30, 2004 compared to fiscal year
ended June 30, 2003.
Net cash provided by operations
was $25.8 million for the fiscal year ended June 30,
2004, as compared to net cash used in operations of
$13.6 million during the fiscal year ended June 30,
2003. The increase in cash provided by operations of
$39.4 million was primarily a result of our net income for
fiscal 2004 of $35.8 million versus a net loss of
$22.6 million during fiscal year 2003. The increase in net
income was tempered by the non-cash impact of the reversal of
the income tax valuation allowance of $16.8 million and the
payment of a $2.0 million litigation settlement.
Net cash provided by investing activities was $3.8 million
during the fiscal year ended June 30, 2004, as compared to
net cash used by investing activities of $402,000 during the
fiscal year ended June 30, 2003. The increase in cash
provided by investing activities of $4.2 million was
primarily due to the proceeds of $5.6 million during fiscal
year 2004 related to the sale of our manufacturing assets to
Cardinal Health and was offset by a $1.3 million payment
made during fiscal year 2004 related to a license agreement
entered into with Pharmaceutical Design L.L.C., or PD.
Net cash provided by financing activities was $4.4 million
and $16.1 million for the fiscal years ended June 30,
2004 and 2003, respectively. The decrease in net cash provided
by financing activities of $11.7 million was primarily due
to the sale of $16.3 million of the 8% Convertible Notes
during fiscal year 2003, as compared to only $4.6 million
during fiscal year 2004.
Fiscal Year ended June 30, 2003 compared to fiscal year
ended June 30, 2002.
Net cash used in operating
activities was $13.6 million and $12.2 million for the
fiscal years ended June 30, 2003 and 2002, respectively.
The increase of cash used in operations of $1.4 million was
primarily due to a $7.1 million increase in the net loss
for fiscal year 2003, as compared to fiscal year 2002, which was
partially offset by an increase of $3.2 million of non-cash
expenses primarily related to beneficial conversion interest and
an increase in operating liabilities in excess of operating
assets of approximately $1.3 million and the
$2.0 million accrual for the CellTech litigation settlement
in fiscal 2003.
Net cash used in investing activities was $402,000 and
$1.9 million for the fiscal years ended June 30, 2003
and 2002, respectively. The decrease in net cash used by
investing activities of $1.5 million was primarily due to a
$1.0 million reduction in purchases of manufacturing
equipment and $500,000 payment made to extend the JMED
Pharmaceuticals, Inc., or JMED, license during fiscal year 2003.
Net cash provided by financing activities was $16.1 million
and $19.8 million for the fiscal years ended June 30,
2003 and 2002, respectively. During fiscal year 2003, we sold
approximately $16.3 million of the 8% Convertible Notes and
Bridge Notes. During fiscal year 2002, we sold approximately
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Table of Contents
$21.4 million of Series B Preferred Stock and
immediately paid off our revolving bank line of credit of
approximately $2.0 million.
Commitments and Contractual Obligations
Our major outstanding contractual obligations relate to
operating leases, raw material purchase commitments, minimum
profit share payments to Cardinal Health under the Cardinal
Health supply agreement, royalty payments on our Mucinex and
Humibid products, and payments under consulting agreements with
former employees. These contract obligations as of June 30,
2004 are as follows:
Less than
More than
Total
1 Year
1-3 Years
3-5 Years
5 Years
(in thousands)
Operating leases(1)
$
5,531
$
829
$
1,727
$
1,438
$
1,537
Purchase obligations(2)
3,225
1,545
1,680
—
—
Cardinal Health profit share(3)
8,545
2,545
6,000
—
—
Royalty payments(4)
4,650
550
1,600
1,500
1,000
Consulting payments(5)
271
271
—
—
—
Total
$
22,222
$
5,740
$
11,007
$
2,938
$
2,537
(1)
Includes the minimum rental payments for our corporate office
    building in Chester, New Jersey, office equipment leases and
    automobile lease payments for the sales force.
(2)
Consists of commitments to purchase raw materials.
(3)
Represents minimum profit share commitments to Cardinal Health
    under the supply agreement.
(4)
Represents minimum royalty payments to CellTech and Cornerstone.
(5)
Includes payments for consulting arrangements with former
    employees.
In April 2004, we entered into a ten-year supply agreement with
Cardinal Health under which Cardinal Health has the exclusive
right to manufacture and supply all of our existing and future
drug products, unless Cardinal Health is unable to manufacture
such products or unable to obtain the means to do so within a
reasonable time frame. Under the supply agreement, we are
committed to pay Cardinal Health a minimum profit share of
$4.0 million, $3.0 million and $3.0 million
during the contract years ending March 31, 2005, 2006 and
2007, respectively. As of December 2004, we had already met the
contract minimum for the contract year ending March 31,
2005.
In March 2004, we entered into a development and license
agreement with PD, an affiliate of JMED, in which we licensed
intellectual property related to a potential product candidate.
Pursuant to this agreement, we paid PD $1.3 million. Under
our agreement with PD, upon a change of control, which includes
this offering, PD has the right to exchange the appraised fair
market value of all of its economic interest, which includes an
on-going royalty interest, in the licensed products into shares
of our common stock. The agreement imposes certain requirements
on the parties, but these requirements have been suspended by an
amendment to the agreement. Under the amendment, we have until
August 31, 2005 to determine if we wish to go forward with
the agreement. If we decide not to go forward, we have agreed to
pay PD $500,000 and the agreement will terminate. In the event
we close this offering prior to the time we have made an
election whether to go forward, we have agreed to issue to
PD shares of our common stock worth $500,000, valued at the
public offering price, as an advance against obligations under
our agreement. After this offering, we will have the option
until August 31, 2005 of going forward with this agreement.
If we do go forward with the agreement, the parties have agreed
to negotiate in good faith to modify certain terms of the
agreement.
In December 2004, we entered into an agreement with JMED for the
assignment of the AlleRx® license agreement to Cornerstone
Biopharma, Inc., or Cornerstone, and we paid JMED
$2.0 million in conjunction with that assignment in January
2005. In connection with the PD license agreement, JMED was
granted the right to convert its on-going royalty interest in
the AlleRx® product into our common
39
Table of Contents
stock in the event of a public offering or change of control.
The assignment of the JMED agreement to Cornerstone provided
that JMED had the right to exchange its royalty interest for our
common stock, as outlined under the PD license agreement. The
valuation of the on-going royalty will be performed by an
outside appraisal firm prior to March 31, 2005. To the
extent that the final appraisal exceeds the $2.0 million
previously paid, JMED will have the right to convert such excess
into our common stock at the public offering price. Upon
conversion of JMED's royalty interest into our common
stock, we will become the recipient of future royalties earned
under the license agreement. If JMED does not elect to convert
the excess royalty interest into our common stock, JMED will
continue to collect royalties under the license agreement, and
we will be paid 40% of such royalties up to a maximum of
$1.0 million. We have agreed to guarantee the royalty
payments due to JMED from Cornerstone through the date of a
change of control or public offering.
In February 2005, we entered into an agreement with Cornerstone
in which we received the Humibid trademarks from Cornerstone and
Cornerstone received the AlleRx® trademarks from us.
Additionally, the parties released each other from all claims
and damages in a lawsuit that we filed against Cornerstone in
2004. As part of this arrangement, we are contractually
obligated to assume the financial responsibility for the first
$1.0 million of returned AlleRx® product that was sold
by us prior to February 15, 2005 and returned to
Cornerstone during the 18 month period beginning
February 15, 2005. Conversely, Cornerstone is financially
responsible for the first $1.0 million of Humibid product
returns for the same 18-month period. After the
$1.0 million threshold is met, we will have the
responsibility for all Humibid product returns whether sold by
us or Cornerstone and Cornerstone will bear the same liability
for AlleRx® products. In connection with this agreement, we
are obligated to pay to Cornerstone a royalty ranging from 1% to
2% of net Humibid sales for a period of three years after
February 15, 2005, with an annual minimum royalty payment
of $50,000.
In connection with the settlement that we reached with CellTech
during April 2004, we agreed to pay to CellTech royalties on
sales of our Mucinex products, subject to an annual maximum of
$500,000 and an annual minimum of $200,000 until
December 31, 2013.
During fiscal year 2004, Cardinal Health's supplier of
dextromethorphan, an active ingredient in Mucinex DM, notified
Cardinal Health that they will be exiting the dextromethorphan
manufacturing business. At such time, Cardinal Health requested
of the supplier, and the supplier agreed, to commit to supplying
Cardinal Health with an approximate four-year supply of
dextromethorphan. However, based upon our recent Mucinex DM
sales activity, we believe that as of December 31, 2004,
the remaining supply will meet our needs through December 2006.
Cardinal Health has made a commitment to the dextromethorphan
supplier and is obligated to take delivery of the material over
the course of three years beginning in September 2004. We have
provided Cardinal Health with a letter agreement, dated
September 30, 2004, stating that we will reimburse Cardinal
Health for Cardinal Health's cost in obtaining any unused
quantities of dextromethorphan at the first to occur of
(i) expiration of the material or (ii) six years from
the date of the letter agreement. Furthermore, we are actively
pursuing alternative sources of material suppliers for
dextromethorphan. As of December 31, 2004, the remaining
commitment is approximately $2.8 million.
Cardinal Health obtains all of the guaifenesin for our products
from a single supplier, Boehringer Ingelheim. According to
Cardinal Health's agreement with Boehringer Ingelheim,
which expires in June 2006, Cardinal Health must purchase all of
the guaifenesin used in Mucinex SE and at least 90% of the
guaifenesin used in our products produced under all subsequent
NDAs.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Quantitative and Qualitative Disclosures about Market
Risk
Our excess cash is invested in short-term U.S. government
securities, high quality money market instruments and corporate
debt. These instruments have various short-term maturities. We
hold no derivative
40
Table of Contents
financial instruments and we do not currently engage in hedging
activities. Accordingly, due to the maturity and credit quality
of our investments, we are not subjected to any substantial risk
arising from changes in interest rates, currency exchange rates
and commodity and equity prices. We do not have any outstanding
debt.
Recent Accounting Pronouncements
SFAS No. 150.
In May 2003, the FASB issued
SFAS No. 150,
Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS No. 150 essentially requires
issuers to classify as liabilities certain types of financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity to be classified
as liabilities. Our preferred stock is contingently redeemable
at the option of the holder and therefore is classified outside
of stockholders' equity.
FASB Interpretation No. 46.
In January 2003, the
FASB issued FASB Interpretation No. 46,
Consolidation of
Variable Interest Entities
(FIN 46), which addresses
the consolidation of business enterprises (variable interest
entities) to which the usual condition (ownership of a majority
voting interest) of consolidation does not apply. The
interpretation focuses on financial interests that indicate
control. It concludes that in the absence of clear control
through voting interests, a company's exposure (variable
interest) to the economic risks and potential rewards from the
variable interest entity's assets and activities are the
best evidence of control. Variable interests are rights and
obligations that convey economic gains or losses from changes in
the values of the variable interest entity's assets and
liabilities. Variable interests may arise from financial
instruments, service contracts, nonvoting ownership interests,
and other arrangements. If an enterprise holds a majority of the
variable interests of an entity, it would be considered the
primary beneficiary. The primary beneficiary would be required
to include the assets, liabilities and the results of operations
of the variable interest entity in its financial statements. In
December 2003, the FASB issued a revision to FIN 46 to
address certain implementation issues. We do not have any
variable interest entities. Accordingly, the adoption of
FIN 46 and FIN 46 (revised) had no impact on our
results of operations, financial position or cash flows.
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Table of Contents
MARKET, RANKING AND OTHER DATA
The data included in this prospectus regarding market share,
historical sales, market size, and ranking, including our
position and the position of our competitors within these
markets, are based on data generated by the independent market
research firms Information Resources, Inc., or IRI, and IMS
Health Incorporated, or IMS Health.
IRI data reports retail sales in the food, drug and mass
merchandise markets. IRI data for the mass merchandise market,
however, does not include Wal-Mart, which ceased providing sales
data to IRI in 2001. Although Wal-Mart represents a significant
portion of the mass merchandise market for us, as well as our
competitors, we believe that Wal-Mart's exclusion from IRI
data does not significantly change our market share or ranking
relative to our competitors. As used in this prospectus, the OTC
cough, cold, allergy, and sinus market includes both the cold,
allergy, sinus and the cough syrup segments as reported by IRI.
We believe our current and future products compete against
products comprising both of these segments as reported by IRI.
IMS Health reports data from various sources including drug
manufacturers, wholesales, retailers, pharmacies, mail order,
long-term care facilities, and hospitals. We rely on IMS
Health-NPA
tm
for prescription and sales data related to our products and IMS
Health-National Sales
Perspectives
tm
for sales information related to the non-retail sector of our
business. This prescription and non-retail data is not reported
in the data we receive from IRI.
We have not independently verified any of the data from these
third party sources. Therefore, we can offer no assurance as to
the accuracy or completeness of included information.
42
Table of Contents
BUSINESS
Overview
We are a specialty pharmaceutical company focused on the
late-stage development, commercialization and marketing of
over-the-counter, or OTC, and prescription pharmaceuticals for
the treatment of respiratory disorders. We currently market two
OTC products under our Mucinex brand and expect to launch four
additional products that are already approved by the
U.S. Food and Drug Administration, or the FDA, over the
next two years.
Mucinex SE, launched in July 2002, is a long-acting,
single-ingredient guaifenesin product. Guaifenesin is an
expectorant that thins bronchial secretions and makes coughs
more productive. Guaifenesin has an established clinical
acceptance. Mucinex DM, launched in August 2004, combines
long-acting guaifenesin with the cough suppressant
dextromethorphan. According to IRI, for the 52-week period ended
January 23, 2005, Mucinex was the seventh best-selling
brand of the 168 brands in the cough, cold, allergy, and sinus
market, based on retail dollar sales.
For the fiscal year ended June 30, 2004, our revenues were
$61.3 million and our net income was $35.8 million
(including a tax benefit of $16.1 million related primarily
to the future benefit of our net operating loss). This
represents a 337% growth in revenues over the fiscal year ended
June 30, 2003. For the six months ended December 31,
2004, our revenues were $62.0 million and our net income
was $9.2 million, representing a 129% increase in revenues
over the six months ended December 31, 2003.
The FDA has approved additional long-acting guaifenesin products
that we have developed. Mucinex D, approved in June 2004,
combines long-acting guaifenesin with the decongestant
pseudoephedrine. Also, the FDA has approved three maximum
strength products: a single-ingredient guaifenesin product; a
guaifenesin/dextromethorphan combination product; and a
guaifenesin/pseudoephedrine combination product. Each of these
maximum strength products has twice the amount of active
ingredients as its Mucinex counterpart. We expect to launch
Mucinex D and Humibid, our maximum strength,
single-ingredient guaifenesin product, in the first quarter of
2006, and the remaining maximum strength formulations in the
second half of 2006. We are currently working on the development
of two additional OTC products and one new prescription product,
each of which combines long-acting guaifenesin with other active
ingredients.
All of our Mucinex products and their maximum strength versions
are based on our patented delivery system for guaifenesin. Our
delivery system has an immediate release component to provide
rapid relief from excess mucus and an extended-release component
to provide a 12-hour effect. We intend to utilize this delivery
system technology in other OTC and prescription products to
treat additional respiratory disorders.
Mucinex SE, Mucinex DM and Mucinex D and their maximum strength
versions are the only long-acting guaifenesin products approved
by the FDA. The FDA's policy is to remove unapproved
products from the market once a similar product has been
approved. Following approval of Mucinex SE, the FDA took
enforcement action to remove all other long-acting,
single-ingredient guaifenesin products from the market in
December 2003. Based on IMS
Health-NPA
tm
data, we estimate that, for the 12 months ended
June 30, 2003, approximately 10.5 million
prescriptions were dispensed for competing long-acting,
single-ingredient guaifenesin products. Mucinex SE is now the
only product available to meet this demand, and we believe that
we have switched the majority of these prescriptions to OTC
sales of Mucinex SE. Based on IMS
Health-NPA
tm
data, we estimate that, for the 12 months ended
June 30, 2003, approximately 14.5 million
prescriptions were dispensed for products containing long-acting
guaifenesin in combination with dextromethorphan or
pseudoephedrine. If the FDA removes competitive unapproved
products under its policy, Mucinex DM and Mucinex D,
when introduced, would be the only products available to meet
this demand. If the FDA removes these unapproved products from
the market, we believe a majority of the prescriptions currently
dispensed for those products would be switched to OTC sales of
Mucinex DM and Mucinex D.
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We believe the approval of Mucinex SE, Mucinex DM and Mucinex D
as OTC products represents an opportunity to introduce
long-acting guaifenesin and combination products into a larger
OTC market where guaifenesin was previously only available in
short-acting form. We believe, based on IRI data, that the
current OTC cough, cold, allergy, and sinus market is
approximately 17 times the size of the prescription market for
products similar to our approved products, based on units sold
for the 12 months ended June 30, 2003.
We employ a dual marketing approach to take advantage of the
former prescription status of the long-acting guaifenesin market
and the OTC opportunity. Our 100-person professional sales force
attempts to educate physicians and other healthcare
professionals about the benefits of long-acting guaifenesin
products and encourages these physicians and other healthcare
professionals to recommend our products to their patients. Our
sales force also seeks to educate pharmacists about our products
and encourage them to recommend Mucinex to customers. We
launched a consumer advertising campaign to reach the consumer
market through television, print and radio advertising to
increase consumer trial and awareness of the Mucinex brand. Our
focused positioning is embodied in our tag line "Mucinex
In, Mucus Out" and our message is communicated through an
animated character called "Mr. Mucus."
The following table shows the retail tablet sales of Mucinex SE,
based on data from IRI, as well as the effects of the FDA's
removal of products competitive with Mucinex SE from the market
and our consumer advertising campaign:
The Respiratory Therapeutics Market
Market Overview.
Respiratory disorders include serious
conditions such as emphysema, pneumonia, chronic obstructive
pulmonary disease (COPD), and chronic bronchitis for which
patients seek professional medical treatment, as well as less
serious disorders, including the common cold, sinusitis,
bronchitis, and allergy, which patients often diagnose and treat
by themselves. Likewise, respiratory therapeutics range from
prescription pharmaceuticals prescribed by a physician to OTC
pharmaceuticals that are purchased by the consumer, often as the
result of a physician's or pharmacist's
recommendation. According to IMS
Health-NPA
tm
and IMS Health-National Sales
Perspectives
tm
,
in 2004, the prescription market in the United States for all
respiratory disorders was approximately $13.4 billion while
the prescription cough and cold market in the United States was
approximately $1.3 billion. According to IRI, consumers
spent approximately $2.6 billion on OTC cough, cold,
allergy, and sinus remedies during the 52 weeks ended
January 23, 2005.
Respiratory disorders have different causes and symptoms, but
the production of excess or thick mucus is a common factor in
many respiratory disorders. Mucus often exacerbates respiratory
disorders such as acute respiratory infections, bronchitis,
common cold, cough, and sinusitis. Guaifenesin, the principal
active ingredient in our products, is the only FDA-approved
expectorant. It helps loosen mucus and thin bronchial secretions
to rid the bronchial passageways of bothersome mucus and make
coughs
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Table of Contents
more productive. Guaifenesin is available in both long-acting
and short-acting formulations and as a single ingredient or in
combination with other active ingredients. Long-acting
formulations are typically in tablet form and dosed every
12 hours. Short-acting or immediate release formulations
are often in liquid form and are dosed every 4 to 6 hours.
Historically, the long-acting formulations were available in the
United States by prescription only, while short-acting
formulations were available OTC.
The Long-Acting Guaifenesin Market.
Physicians prescribe
single-ingredient and combination long-acting guaifenesin
products to address the excess mucus associated with respiratory
disorders such as acute respiratory infections, bronchitis,
common cold, cough, and sinusitis. Based on data from IMS
Health-NPA
tm
,
we estimate that approximately 25 million prescriptions
were dispensed for long-acting, single-ingredient and
combination guaifenesin products containing dextromethorphan or
pseudoephedrine for the 12 months ended June 30, 2003.
According to IMS Health-National Disease and Therapeutic
Index
tm
,
these prescriptions were often written in combination with an
antibiotic.
Estimated
Number of
Prescriptions
(in millions)
Single-ingredient Guaifenesin
10.5
Guaifenesin and Dextromethorphan HBr (Cough Suppressant)
3.0
Guaifenesin and Pseudoephedrine HCl (Decongestant)
11.5
We believe that, based on data from IMS
Health-NPA
tm
,
approximately 91% of all prescriptions for long-acting,
single-ingredient and combination guaifenesin were historically
filled with generic drugs. Branded long-acting guaifenesin
products were not actively promoted despite the fact that
doctors routinely prescribed certain brand names. We believe
that the brand name with the most recognition in the market was
Humibid, for which approximately 2.8 million prescriptions
were written during 2003, according to IMS
Health-NPA
tm
.
We acquired the Humibid brand in February 2005.
The OTC Cough, Cold, Allergy, and Sinus Market.
According
to the American Lung Association, adults contract two to four
colds per year primarily between September and May. The OTC
"cough, cold, allergy, and sinus" market includes
products that consumers purchase over the counter to address
mild respiratory disorders such as the common cold, cough and
allergic rhinitis. These mild respiratory disorders often have
multiple symptoms including nasal, sinus and bronchial
congestion, cough, runny nose, and fever. Many of these products
contain more than one active ingredient in order to be effective
against several different cough and cold symptoms. Guaifenesin,
in short-acting formulations, is an ingredient in many of these
cough and cold OTC products.
Familiar brand names in the OTC cough, cold, allergy, and sinus
market include Vicks® (Dayquil®/ Nyquil®),
Tylenol®, Benadryl®, Sudafed®, Claritin®,
and Robitussin®. These products generally contain active
ingredients such as acetaminophen, dextromethorphan,
diphenhydramine, guaifenesin, loratidine, phenylephrine, and
pseudoephedrine. This market is fairly fragmented with seven
brands, including our Mucinex products, accounting for 51% of
dollar sales during the 52-week period ended January 23,
2005, according to IRI. During this same period, according to
IRI, private label products represented 24% of this market. We
believe, based on IRI data, that the OTC cough, cold, allergy,
and sinus market is approximately 17 times the size, in terms of
units, of the 25 million prescription market for products
similar to our approved products.
Our Competitive Strengths
Mucinex SE is the Only Long-Acting, Single-Ingredient
Guaifenesin Product Available in the United States.
In
December 2003, the FDA removed all competing long-acting,
single-ingredient guaifenesin products from the
U.S. market. As a result, Mucinex SE is now the exclusive
FDA-approved, long-acting, single-ingredient expectorant
available in the United States. Due to our exclusive position
and professional and consumer promotional efforts, net sales of
Mucinex SE increased from $4.5 million during the
fiscal year ended June 30, 2003 to $52.9 million
during the fiscal year ended June 30, 2004.
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Table of Contents
Strength of the Mucinex Brand.
On November 15, 2004,
we launched a television, print and radio advertising campaign
to build awareness of the Mucinex brand in the consumer market.
The table below identifies brand rank and market share by dollar
sales for the leading brands in the OTC cough, cold, allergy,
and sinus market, as reported by IRI for the 52, 12 and
four weeks ended January 23, 2005.
Brand Rank (1)
Market Share (1)
52 Weeks
12 Weeks
4 Weeks
52 Weeks
12 Weeks
4 Weeks
Brand
Ended
Ended
Ended
Ended
Ended
Ended
Private label
23.5
%
21.5
%
20.9
%
Claritin®
1
4
6
10.6
6.0
5.5
Tylenol®
2
2
2
9.4
10.2
10.3
Vicks®
3
1
1
8.9
11.3
11.5
Robitussin®
4
3
3
7.5
8.8
9.4
Benadryl®
5
7
7
6.2
4.3
4.1
Sudafed®
6
5
4
6.0
5.8
5.9
Mucinex
7
6
5
2.8
4.9
5.7
Alka Seltzer Plus®
8
9
9
2.2
2.7
2.8
Alavert®
9
12
12
2.1
0.9
0.8
Advil®
10
11
10
2.1
2.2
2.3
Triaminic®
11
10
11
2.0
2.5
2.1
Theraflu®
12
8
8
2.0
3.0
3.1
Others
13 through 168
13 through 158
13 through 151
14.9
15.9
15.6
Total
100.0
%
100.0
%
100.0
%
(1)
Includes products sold in the OTC cough, cold, allergy, and
    sinus market and does not include other products marketed under
    these brand names.
In June 2004, Mucinex SE was recognized by NACDS Marketplace as
the best new product in the "Healthcare/ OTC"
category. Later in 2004, Mucinex SE was voted the #1 new
product in the "Cough/ Cold/ Allergy" category at the
Retail Excellence Awards hosted by Drug Store News. We believe
professional and consumer awareness of the Mucinex brand
provides a significant foundation for our planned Mucinex line
extensions and will help us grow our market share and achieve
long-term profitability.
Our Patented Guaifenesin Delivery System Provides a Platform
for the Introduction of Additional Respiratory Products.
All
of our current products utilize our patented delivery system,
which has an immediate release component of guaifenesin to match
the effects of an immediate release product and an
extended-release component for long-lasting effect. We intend to
utilize this technology in products that combine guaifenesin
with other ingredients to address other respiratory ailments. We
are currently developing three additional products that utilize
our patented guaifenesin delivery system and combine long-acting
guaifenesin with other active ingredients.
Integrated Effort in Both the Prescription and OTC
Marketplace.
We believe that our experience in the
late-stage development of OTC and prescription products and in
marketing products to both consumers, in the case of OTC
products, and healthcare professionals, in the case of
prescription and OTC products, gives us a unique perspective on
product development opportunities and commercialization
strategies. We consider factors such as the expected timing of
regulatory approvals, costs of effective promotion and likely
competitive landscape in determining how to best position and
most efficiently bring our products to market. We believe this
perspective allows us to identify and evaluate new products and
determine whether they are most suitable for the prescription or
OTC market. We believe that our dual
46
Table of Contents
market perspective combined with our professional sales force
and the versatility of our guaifenesin delivery system
technology enables us to integrate our efforts in the
prescription and OTC marketplaces.
Experienced Senior Management Team with Proven Ability to
Develop and Grow Brands.
Our senior management team has over
60 years of combined prescription and consumer
pharmaceutical experience in product and brand development,
commercialization, marketing, and sales. Members of our senior
management team have launched and/or managed many well known
brands within the OTC cough, cold, allergy, and sinus market,
including Sudafed®, Benadryl®, Actifed®,
Theraflu®, Triaminic®, Pediacare®, Tavist®,
and Sinutab®. Members of our team also have managed or been
involved in the development and marketing of well known
prescription brands, including Accupril®, Asacol®,
Dilantin®, Helidac®, Lopid®, and Otrivin®.
We believe that this combined consumer and pharmaceutical
experience is unique among specialty pharmaceutical companies of
similar size.
Our Business Strategy
Our goal is to be a leading specialty pharmaceutical company
with a focus on respiratory therapeutics by building
market-leading brands in the OTC and prescription markets. The
key elements of our strategy to achieve this goal are to:
•
Continue to Switch Prescriptions for Long-Acting Guaifenesin
    into Retail Sales of Our Products.
Based on data from IMS
    Health-NPA
tm
,
    during the 12 months ended June 30, 2003, an estimated
    10.5 million long-acting, single-ingredient guaifenesin
    prescriptions were written by physicians and dispensed by
    pharmacists. As a result of the FDA's removal of all
    competing long-acting, single-ingredient guaifenesin products
    from the U.S. market in December 2003, Mucinex SE is now
    the only long-acting guaifenesin product available in the United
    States. Despite the FDA's removal of the unapproved
    products from the market, physicians continue to write
    prescriptions for these products. In order to switch
    prescriptions for these guaifenesin products to physician
    recommendations for Mucinex SE and Mucinex DM, our
    100-person internal professional sales force details our Mucinex
    products to the approximately 25,000 physicians who have
    traditionally written the majority of long- acting guaifenesin
    prescriptions.
•
Expand the Market by Educating Healthcare Professionals about
    the Benefits of Long-Acting Guaifenesin.
The prescription
    market for long-acting guaifenesin historically consisted
    primarily of generic products. As a result, physicians,
    pharmacists and other healthcare professionals were not
    regularly detailed about the benefits of long-acting
    guaifenesin. Our sales force seeks to educate these
    professionals as to the therapeutic value of long-acting
    guaifenesin, in an effort to expand the market for our current
    and future products. We have also organized a panel of leading
    physicians specializing in respiratory care to study the use of
    long-acting guaifenesin products and to further establish the
    products as valuable therapeutic agents in the field.
•
Build the Mucinex Brand in the Consumer Market.
While
    guaifenesin in short-acting formulations is a common ingredient
    in numerous OTC cough, cold, allergy, and sinus remedies,
    long-acting guaifenesin was available only by prescription until
    the FDA's approval of Mucinex SE as an OTC product.
    According to IRI, for the 52-week period ended January 23,
    2005, the retail OTC market for cough, cold, allergy, and sinus
    remedies was approximately $2.6 billion. Our consumer
    advertising strategy is to educate consumers about the unique
    benefits of Mucinex and encourage consumers to try our products.
    We seek to position Mucinex as the preferred brand for relief
    from congestion due to excess mucus, a symptom common to most
    respiratory ailments. Our current advertising campaign features
    an animated character called "Mr. Mucus" and the
    tag-line "Mucinex In, Mucus Out." We believe this
    focused campaign will expand consumer awareness of Mucinex and
    create a sustainable brand. A recent survey we sponsored
    demonstrates that after use of a Mucinex product, 82% of those
    surveyed indicate that they will definitely or probably purchase
    a Mucinex product again.
47
Table of Contents
•
Launch New Products Under Our Existing Brands.
We seek to
    capture a larger share of the OTC cough, cold, allergy, and
    sinus market by launching new products under our Mucinex and
    Humibid brands. Our first three line extensions are
    Mucinex DM, Mucinex D and Humibid, which incorporate
    our patented technology for long-acting guaifenesin. We intend
    to launch Mucinex D and Humibid in the first quarter of
    2006 and the maximum strength versions of our guaifenesin
    combination products in the second half of 2006.
•
Develop Prescription Respiratory Products.
We intend to
    apply our patented technology to long-acting guaifenesin in
    combination with prescription active ingredients in future
    products. We intend to use this strategy to enter new
    prescription respiratory market segments. We are currently
    considering a number of product candidates in these and other
    categories. We intend to use our existing professional sales
    force to market these products to physicians we currently target.
•
Continue to In-License or Acquire Pharmaceutical Respiratory
    Products and Brands.
We intend to expand our product
    portfolio by selectively in-licensing or acquiring prescription
    or OTC products in the respiratory market. We will focus on
    prescription products in the later stages of development that
    can be sold through our existing sales force. We will also focus
    on brands in the cough, cold, allergy, and sinus market that we
    believe we can grow. As part of this strategy, we acquired the
    Humibid brand, historically a strong brand in the long-acting
    prescription guaifenesin marketplace. We believe this brand will
    provide us with a platform from which to launch the maximum
    strength version of our products and to take advantage of the
    awareness the Humibid brand enjoys among physicians, pharmacists
    and other healthcare professionals. In addition, we are
    evaluating respiratory prescription products available outside
    the United States, which we may license and seek FDA approval to
    introduce in the U.S. market.
Our Products
12 Months Ended
December 31, 2004
Product
Active Ingredients
Launch Year
Net Sales
(in millions)
Mucinex SE
600 mg guaifenesin
2002
$
77.0
Mucinex DM
600 mg guaifenesin/
30 mg dextromethorphan HBr
2004
11.6
Mucinex D
600 mg guaifenesin/
60 mg pseudoephedrine HCl
2006*
—
Humibid
1200 mg guaifenesin
2006*
—
Maximum Strength DM
1200 mg guaifenesin/
60 mg dextromethorphan HBr
2006*
—
Maximum Strength D
1200 mg guaifenesin/
120 mg pseudoephedrine HCl
2006*
—
*
Proposed launch year
Mucinex SE.
Mucinex SE is an extended-release,
bi-layer tablet containing 600 mg of guaifenesin.
Mucinex SE helps loosen phlegm (mucus) and thin
bronchial secretions to rid the bronchial passageways of
bothersome mucus and make coughs more productive. In July 2002,
we received FDA approval of a new drug application, or NDA, for
Mucinex SE. For the fiscal year ended June 30, 2004
and the six months ended December 31, 2004, our net
sales for Mucinex SE were $52.9 million and
$47.3 million, respectively. According to IRI, for the
52-week period ended January 23, 2005, our Mucinex SE
40 count and 20 count stock keeping units, or SKUs, ranked
number three and five, respectively, among more than one
thousand SKUs in the cough, cold, allergy, and sinus market (in
terms
48
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of retail dollar sales). In June 2004, Mucinex SE was
recognized by NACDS Marketplace as the best new product in the
"Healthcare/ OTC" category. Later in 2004, Mucinex SE
was voted the #1 new product in the "Cough/ Cold/
Allergy" category at the Retail Excellence Awards hosted by
Drug Store News.
Mucinex DM.
Mucinex DM combines the expectorant
properties of Mucinex SE with the cough suppressant
dextromethorphan. In April 2004, the FDA approved our NDA for
Mucinex DM, which is the only long-acting guaifenesin and
dextromethorphan combination product approved by the FDA. We
launched Mucinex DM during August 2004 and, through
December 31, 2004, we have achieved net sales of
$11.6 million. According to IRI, for the 12-week period
ended January 23, 2005 our Mucinex DM 40 count and 20
count SKUs were the number 39 and seven, respectively, SKUs
(in terms of retail dollar sales).
Mucinex D.
Mucinex D adds the decongestant
pseudoephedrine to the expectorant properties of Mucinex SE. In
June 2004, the FDA approved our NDA for Mucinex D, which is
the only long-acting guaifenesin and pseudoephedrine combination
product approved by the FDA. We intend to begin marketing
Mucinex D in the first quarter of 2006.
Maximum Strength Guaifenesin Product Line.
We have also
received FDA approval for extended-release formulations of
guaifenesin, guaifenesin/dextromethorphan and
guaifenesin/pseudoephedrine at twice the strength of the
approved Mucinex formulations. We also recently acquired the
rights to the Humibid brand. We believe that Humibid was the
most recognized brand in the former prescription long-acting
guaifenesin market. According to IMS
Health-NPA
TM
,
during 2003, approximately 2.8 million prescriptions were
written for Humibid. In the first quarter of 2006, we intend to
launch the maximum strength version of our single-ingredient
guaifenesin product under the Humibid brand and target the
physician community that continues to prescribe Humibid. We also
intend to launch the remaining maximum strength combination
formulations in the second half of 2006.
The FDA's Removal of Competing Products.
Mucinex SE, Mucinex DM and Mucinex D and their
maximum strength versions are the only long-acting guaifenesin
products approved by the FDA. The FDA's policy is to remove
unapproved products from the market once a similar product has
been approved. Following approval of Mucinex SE, the FDA took
enforcement action to remove other long-acting,
single-ingredient guaifenesin products, all of which were
unapproved products. As a result, Mucinex SE is currently
the exclusive alternative to what we estimate, based on IMS
Health-NPA
TM
data, were formerly 10.5 million prescriptions dispensed
for long-acting, single-ingredient guaifenesin products. Prior
to the FDA's enforcement action, physicians continued to
prescribe and pharmacies continued to dispense long-acting,
single-ingredient guaifenesin as prescription products, and we
believe less than 5% of the prescriptions written resulted in
retail sales of Mucinex SE, despite Mucinex SE being
the only FDA-approved product. After the FDA's enforcement
action, we believe that a majority of physician prescriptions
for long-acting, single-ingredient guaifenesin were switched to
retail sales of Mucinex SE. If the FDA were to enforce its
policy on products containing long-acting guaifenesin in
combination with dextromethorphan or pseudoephedrine, all of
which are unapproved, we believe a majority of the estimated
14.5 million prescriptions, based on IMS
Health-NPA
TM
data, currently dispensed for those products would be switched
to OTC sales of Mucinex DM and Mucinex D, when
introduced.
Product Pipeline.
We are developing additional OTC and
prescription products for the respiratory market utilizing our
patented delivery system for guaifenesin. We are currently
working on the development of three additional products
combining guaifenesin with other active ingredients to treat
prevalent respiratory disorders. We have developed formulations
for these products and one of the products is undergoing
clinical testing. In addition, we are actively reviewing
opportunities to in-license or acquire prescription products for
the respiratory markets.
Our Sales and Marketing Strategy
We utilize a dual marketing strategy for our Mucinex products.
We seek to capitalize on the historic prescription nature of the
market for long-acting, single-ingredient and combination
guaifenesin
49
Table of Contents
products by continuing to develop physician and pharmacist
support for long-acting guaifenesin and combination products. We
also introduced our Mucinex products to consumers in an effort
to expand the available market and capture a meaningful share of
the OTC cough, cold, allergy, and sinus market, which, we
believe, based on IRI data, is approximately 17 times the size,
in terms of units, of the 25 million prescription market
for products similar to our approved products.
Professional Marketing.
Our physician marketing efforts
focus primarily on primary care and respiratory specialist
physicians such as allergists and otolaryngologists, or ear,
nose and throat doctors. We estimate, based on IMS
Health-NPA
TM
data, that, for the 12 months ended June 30, 2003,
approximately 13.5 million prescriptions were dispensed for
prescription single-ingredient and combination guaifenesin
products similar to our Mucinex SE and Mucinex DM. We
believe approximately 25,000 physicians wrote 60% of these
prescriptions. With our 100-person sales force, we are able to
effectively market Mucinex SE and Mucinex DM to
approximately 80% of these physicians and encourage them to
write recommendations for our products. In addition, many
physicians continue to write prescriptions for long-acting,
single-ingredient guaifenesin despite its OTC status. This trend
continues even though the former prescription products have been
removed from the market as a result of the FDA action. We
believe these prescriptions routinely result in
pharmacist-directed sales of Mucinex.
Because the prescription market for long-acting guaifenesin was
91% generic, based on data from
IMS Health-NPA
TM
,
we believe long-acting guaifenesin was not actively promoted.
Our professional marketing campaign attempts to educate
physicians, pharmacists and other healthcare professionals on
the benefits of our products to encourage them to recommend our
products to their patients and customers. As we develop
additional respiratory products, we intend to utilize and
further expand our sales force to market these products to
physicians. We have also organized a panel of leading physicians
specializing in respiratory care to study the use of long-acting
guaifenesin products and to further establish the products as
valuable therapeutic agents in the field.
Consumer Marketing.
In November 2004, we launched our
advertising campaign featuring "Mr. Mucus" and
utilizing the tag line "Mucinex In, Mucus Out." The
launch of this campaign coincided with the traditional onset of
the cough and cold season in the United States. We believe this
campaign communicates the effectiveness of Mucinex in relieving
chest congestion by removing excess mucus and will expand
consumer awareness of the Mucinex brand. One way we gauge the
effectiveness of our advertising campaign is by measuring aided
brand awareness. Aided brand awareness is a consumer's
ability to identify our product after being told the
product's name. Based on research we sponsored, aided brand
awareness has increased from 14% prior to the launch of our
advertising campaign to 55% for the four weeks ended
March 5, 2005. Retail sales have continued to climb
steadily throughout the season.
Trade Sales and Distribution
Our customers consist of drug wholesalers, retail drug stores,
mass merchandisers, and grocery stores in the United States. We
believe that each of these channels is important to our business
and we continue to seek opportunities for growth in each sector.
The following table sets forth the percentage of gross sales for
all of our customers for the last two fiscal years and the six
months ended December 31, 2004 across our major
distribution channels:
Percentage of Gross Sales
Six Months Ended
Channel of Distribution
December 31, 2004
2004
2003
Wholesale Drug
39.30
%
69.49
%
89.83
%
Drug
33.75
18.70
6.59
Mass
15.06
6.96
1.82
Food
11.36
4.16
1.71
Other
0.52
0.68
0.05
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Certain drug wholesale customers distribute our products in
non-retail institutions, such as federal facilities, long-term
care facilities, hospitals, clinics, and HMOs. For the
12 months ended December 31, 2004, based on IMS
Health-National Sales
Perspectives
TM
data, we believe approximately 19% of our sales were directed to
non-retail channels.
Our top 10 customers account for approximately 91% of our gross
sales for the fiscal year ended June 30, 2004 and 82% of
our gross sales for the six months ended December 31,
2004. The following table sets forth a list of our primary
distribution channels and our principal customers for each
channel:
Channel of Distribution
Customers
Wholesale Drug
AmerisourceBergen
Cardinal Health
McKesson*
Drug
CVS*
Eckerd
Rite Aid
Walgreens*
Food
Albertsons
Kroger
Safeway
Mass
Kmart
Target
Wal-Mart*
*
Represents customers who each accounted for greater than 10% of
    our gross sales for the six months ended December 31, 2004.
Our trade sales force calls on national and regional retail
accounts and wholesale distribution companies. The primary focus
of our trade sales force is to maximize our shelf presence at
retail drug, food and mass merchandise stores to support the
efforts of our professional sales representatives and consumer
advertising campaign. For the more fragmented food channel and
for smaller chains and individual stores, we rely on a national
network of regional brokers to provide retail support. Our trade
sales force performs analysis that helps both our sales
representatives and our customers understand sales patterns and
create appropriate promotions and merchandising aids for our
products.
Between December 2003 and December 2004, we expanded our trade
sales force from one to six professionals. During that same time
frame, we have expanded our shelf presence at food, drug and
mass merchandiser stores. We believe a product's importance
to major retailers and attractiveness to consumers can be
measured by the All Commodity Volume Index, or ACV, as reported
by IRI. ACV measures the weighted sales volume of stores that
sell a particular product out of all the stores that sell
products in that market segment generally. We believe that ACV
is a measure of a product's importance to major retailers.
In the case of our products, ACV measures the percentage of
retailers that sell our products out of all retailers that sell
cough, cold, allergy, and sinus remedies (on a weighted sales
volume basis). The following table summarizes our ACV for each
of our products:
ACV 4 Weeks Ended January 23,
2005
2004
Drugs
Food
Food/Drug/Mass
Drugs
Food
Food/Drug/Mass
Mucinex SE
94.2
%
53.1
%
78.1
%
65.4
%
14.1
%
40.4
%
Mucinex DM
84.3
37.9
62.2
—
—
—
In April 2004, we entered into a three-year exclusive
distribution and logistics agreement with Cardinal Health. Under
this agreement, Cardinal Health is responsible for warehouse
inventory operations, logistics, shipping, billing, and customer
collections on a fee-for-service basis.
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Government Regulation
The manufacturing and marketing of both prescription and OTC
pharmaceutical products in the United States are subject to
extensive regulation by the federal government, primarily the
FDA, under the Federal Food, Drug and Cosmetic Act, or FDCA, the
Controlled Substance Act and other federal statutes and
regulations.
FDA Approval Process
Most drug products obtain FDA marketing approval pursuant to a
new drug application, or NDA, or an abbreviated new drug
application, or ANDA. A third alternative is a special type of
NDA, commonly referred to as a Section 505(b)(2) NDA or
505(b)(2) application, which enables the applicant to rely, in
part, on the safety and efficacy data of an existing product, or
published literature, in support of its application. Our
existing products were approved pursuant to
Section 505(b)(2) NDAs, as further described below. While
we may seek approval of future products through any of these
processes, we expect to seek approval for most of our future
products using NDAs and Section 505(b)(2) NDAs.
•
New Drug Applications.
NDAs are the standard applications
    required for new drug products and require extensive original
    clinical data demonstrating the safety and efficacy of the
    product candidate. Typically, NDAs require three phases of human
    clinical trials. In Phase I, the product candidate is
    introduced into humans and tested for safety, dose ranges and
    pharmacokinetics. In Phase II, the product candidate is
    introduced into a slightly larger patient population to assess
    efficacy for specific indications, assess response rates
    tolerance, determine optimal dose, and identify safety risks and
    adverse effects. In Phase III, the product candidate is
    introduced in an expanded patient population at multiple
    geographically dispersed sites to further test for safety and
    clinical efficacy. In addition, prior to beginning the human
    clinical trial work required for either a NDA or
    Section 505(b)(2) NDA, an applicant must obtain approval to
    begin this clinical testing by submitting an Investigational New
    Drug application, or IND, to the FDA, which includes the results
    of preclinical animal studies.
•
Abbreviated New Drug Applications.
An ANDA is a type of
    application in which approval is based on a showing of
    "sameness" to an already approved drug product. ANDAs
    do not contain full reports of safety and effectiveness as
    required in NDAs but rather demonstrate that their proposed
    products are "the same as" reference products with
    regard to their conditions of use, active ingredients, route of
    administration, dosage form, strength, and labeling. ANDA
    applicants are also required to demonstrate the bioequivalence
    of their products to the reference product. Bioequivalence
    generally means that there is no significant difference in the
    rate and extent to which the active ingredients enter the
    blood-stream and become available at the site of drug action.
•
505(b)(2) Applications.
If a proposed product represents
    a change from an already approved product, and therefore does
    not qualify for an ANDA, the applicant may be able to submit a
    Section 505(b)(2) NDA or 505(b)(2) application. A 505(b)(2)
    application is made pursuant to Section 505(b)(2) of the
    FDCA and is a NDA that relies on one or more investigations
    conducted by a party other than the applicant in connection with
    an existing approved product. The FDA has determined that
    505(b)(2) applications may be submitted for products that
    represent changes from approved products in conditions of use,
    active ingredients, route of administration, dosage form,
    strength, or bioavailability. A 505(b)(2) applicant must
    reference an approved product as well as the related safety data
    on which it proposes to rely. The applicant must also provide
    the FDA with any additional clinical data necessary to
    demonstrate the safety and effectiveness of the product with the
    proposed changes. Consequently, while an applicant avoids
    duplication of preclinical and certain clinical safety and
    efficacy studies through the use a 505(b)(2) application, the
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applicant is usually required to perform at least one additional
    human clinical study in support of the application.
In seeking approval for a drug through a NDA or 505(b)(2)
application, applicants are required to list with the FDA each
patent with claims that cover the applicant's product. Upon
approval of a drug, each of the patents listed in the
application for the drug are then published in the FDA's
Approved Drug Products with Therapeutic Equivalence Evaluations
list, commonly known as the Orange Book. Applicants that file an
ANDA or 505(b)(2) application must certify, with respect to each
product referenced in their applications, that no patent exists
in the Orange Book for that reference product, that the listed
patents have expired, that the application may be approved upon
the date of expiration of the listed patents, or that the
patents listed in the Orange Book for the reference product are
invalid or will not be infringed by the marketing of the
applicant's product. When an applicant submits an
application containing a certification that a reference
product's patents are invalid or not infringed, the
applicant must also provide notice to the owner of the reference
product's patent. If the owner of the reference product
determines in good faith that the applicant's product would
infringe a valid patent listed in the Orange Book for the
reference drug and files suit within 45 days of receiving
notice of the application, the owner of the reference product is
entitled to a one-time stay of up to 30 months to resolve
the issue through litigation. During that time, the FDA will not
approve the applicant's application. The FDA may approve
the proposed product at the end of 30 months or upon an
earlier court determination that the patent is invalid or not
infringed.
In addition, the FDA must inspect and find that manufacturing
facilities comply with cGMP before it will approve a drug
application. After the FDA approves a drug application, if any
material change in the manufacturing process, equipment or
location occurs that would necessitate additional data, then the
FDA must review and approve such change before the product may
be marketed.
Even after approval by the FDA, all marketed products and their
manufacturers continue to be subject to annual reporting,
facility inspection and continued governmental review.
Subsequent discovery of previously unrecognized problems or
failure to comply with applicable regulatory requirements could
result in restrictions on manufacturing or marketing of the
product, product recall or withdrawal, fines, seizure of
product, or criminal prosecution, as well as withdrawal or
suspension of regulatory approvals. In addition, the advertising
of all marketed OTC products are subject to the Federal Trade
Commission and state consumer protection regulations.
Some products intended for OTC marketing require FDA approval
through one of the three processes described above. Many OTC
drugs, however, may be commercially distributed without prior
FDA approval by following the FDA's OTC monographs. The OTC
monographs classify certain drug ingredients as safe for
specified uses and establish categorical requirements for the
marketing of drugs containing such ingredients without
pre-approval. Our existing products containing a new formulation
of sustained release guaifenesin are not OTC monograph drugs and
were approved pursuant to Section 505(b)(2) NDAs, as
described above.
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Approval of Our Existing Guaifenesin Products.
The
following table sets forth when the FDA approved the 505(b)(2)
applications for our existing guaifenesin products:
505(b)(2)
Application or
Supplement
Product
IND Filing
Submission
FDA Approval
Mucinex SE
June 1998
June 2000
July 2002
Humibid
June 1998
August 2002
December  2002
Mucinex DM
September  2000
June 2003
April 2004
Maximum strength guaifenesin/
dextromethorphan HBr
combination
September  2000
June 2003
April 2004
Mucinex D
September  2000
January 2003
June 2004
Maximum strength guaifenesin/
pseudoephedrine HCl
combination
September  2000
January 2003
June 2004
While all of these products have been approved for marketing, we
have only launched Mucinex SE and Mucinex DM to date. We expect
to launch Mucinex D and Humibid in the first quarter of
2006 and the remaining maximum strength formulations in the
second half of 2006.
In 2002, the FDA approved our 505(b)(2) application for Mucinex
SE as an OTC long-acting guaifenesin product. Prior to our
505(b)(2) application for Mucinex SE, only short-acting
guaifenesin products had been marketed OTC, while long-acting
guaifenesin products were marketed as prescription drugs despite
their lack of formal approval by the FDA. Under the Durham
Humphrey Act of 1951, the FDA established that no drug may
simultaneously be sold as a non-prescription product and as a
prescription product at the same dose for the same indication.
Any products that violate this rule are subject to FDA
regulatory action and removal from the market.
On October 11, 2002, the FDA issued 66 warning letters to
the manufacturers, distributors, marketers, and retailers of
single-ingredient guaifenesin extended-release products. The
letters stated that such prescription products require FDA
approval, and without FDA approval, they could no longer be
marketed legally. A number of the manufacturers and distributors
that received a warning letter from the FDA filed a
"Citizens Petition," which is similar to an appeal,
with the FDA requesting that the agency either elect not to
enforce existing regulatory policies requiring removal of the
drugs from the market or delay such enforcement. On
February 25, 2003, the FDA issued a letter in response to
the Citizens Petition to the 66 recipients of the original
warning letter, reiterating that following the FDA's
approval of Mucinex SE in July 2002, all other
single-ingredient guaifenesin extended-release drug products may
no longer be marketed legally. The FDA decided, however, to
allow a grace period for such drugs to be removed from the
market as follows:
•
the warning letter recipients were required to cease
    manufacturing unapproved single-ingredient guaifenesin
    extended-release products no later than May 21, 2003;
•
no distribution (including distribution by secondary wholesalers
    or other distributors) could occur after October 23,
    2003; and
•
no retail sales could occur after November 30, 2003.
In October 2003, the FDA published a draft compliance policy
guide describing its intent to exercise its enforcement
discretion with regard to drugs marketed in the United States
that do not have required FDA approval for marketing once the
FDA has approved a similar drug. In publishing the draft policy
guide, the FDA publicly affirmed the actions it took relating to
long-acting, single-ingredient guaifenesin products. As of this
date, however, the FDA has only taken regulatory action to
remove from the market single-ingredient, extended-release
guaifenesin. Mucinex DM and our maximum strength,
long-acting guaifenesin and dextromethorphan combination
product, as well as Mucinex D and our maximum
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strength, long-acting guaifenesin and pseudoephedrine
combination product, have also received approval pursuant to
Section 505(b)(2) NDAs. We are hopeful the FDA will take
similar action on extended-release guaifenesin in combination
products. However, there can be no assurance that the FDA will
do so or when any such action may take place.
Effective Market Exclusivity for Long-Acting,
    Single-Ingredient Guaifenesin Products
The FDA's action to remove all existing long-acting,
single-ingredient guaifenesin products from the market has
enabled Mucinex SE to obtain a period of effective market
exclusivity. This regulatory position results in two barriers to
entry for potential competitors. First, we believe that a third
party product that is sufficiently similar to Mucinex SE to be
eligible for approval through the ANDA process would infringe
our patent covering our extended-release delivery system for
guaifenesin. Second, we believe that the process of developing a
drug with a different pharmacokinetic profile and obtaining FDA
approval of such drug through a NDA or 505(b)(2) application
would take two to three years from the start of such process. If
the FDA removes from the market products similar to Mucinex DM,
Mucinex D and their maximum strength counterparts, third parties
seeking to introduce similar products will face the same
barriers to entry.
Other Regulation
The Prescription Drug Marketing Act, or the PDMA, imposes
requirements and limitations upon drug sampling, as well as
prohibits states from licensing distributors of prescription
drugs unless the state licensing program meets certain federal
guidelines that include minimum standards for storage, handling
and record keeping. In addition, the PDMA sets forth civil and
criminal penalties for violations. The FDA and the states are
still implementing various sections of the PDMA.
Manufacturers of marketed drugs must comply with other
applicable laws and regulations required by the FDA, the Drug
Enforcement Administration, the Environmental Protection Agency,
and other regulatory agencies. Failure to do so could lead to
sanctions, which may include an injunction that would suspend
manufacturing, the seizure of drug products and the refusal to
approve additional marketing applications. Manufacturers of
controlled substances are also subject to the licensing, quota
and regulatory requirements of the Controlled Substances Act.
Failure to comply with the Controlled Substances Act and the
regulations promulgated thereunder could subject us to loss or
suspension of those licenses and to civil or criminal penalties.
Reimbursement
In the United States, sales of pharmaceutical products depend in
part on the availability of reimbursement to the patient from
third-party payors, such as government health administrative
authorities, managed care providers and private insurance plans.
Third-party payors are increasingly challenging the prices
charged for medical products and services and examining their
cost-effectiveness. Generally, such payors do not cover OTC
products.
Medicaid, a state health program for certain low-income
individuals, does not generally cover the cost of OTC products.
Under Medicaid, however, 25 state programs have and
continue to cover the cost of long-acting guaifenesin products,
including our products. Any of these states could decide not to
cover our products at any time. In addition, we are obligated to
pay rebates on sales of our products to Medicaid beneficiaries.
We estimate that sales to Medicaid beneficiaries represented
approximately 6% of retail sales of Mucinex SE during the six
months ended December 31, 2004 and 13% for the fiscal year
ended June 30, 2004.
Manufacturing
The Cardinal Health Supply Agreement.
In April of 2004,
we sold our Fort Worth, Texas manufacturing assets to
Cardinal Health and entered into a ten-year supply agreement
with Cardinal Health. Under the supply agreement, Cardinal
Health provides us with finished goods for a share of our
profit. The profit sharing structure provides that as our gross
profit (before the profit share) increases,
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Cardinal Health's percentage share of the gross profit
decreases. The agreement runs on a contract year that ends
March 31. Pursuant to the agreement, we are committed to
pay Cardinal Health a minimum profit share of $4.0 million,
$3.0 million and $3.0 million during the contract
years ending in 2005, 2006 and 2007, respectively. Additionally,
Cardinal Health has the exclusive right to manufacture our
current products and a right to manufacture any new drug
products we intend to market, unless Cardinal Health does not
have the means to do so and cannot be expected to obtain such
means within a reasonable time frame.
Currently, Cardinal Health only manufactures products for us at
the Fort Worth facility. However, we are currently
validating an additional Cardinal Health facility and other
secondary suppliers to Cardinal Health in the event of a
catastrophe at a Cardinal Health facility or other disruption to
manufacturing. Packaging is currently being done in
Fort Worth, at an alternate Cardinal Health site and by an
additional third party. We anticipate having validated
alternative facilities by June 30, 2005. We continue to
evaluate alternative sites and will validate such sites as
necessary to provide a steady supply of product.
Raw Material Sourcing Arrangements.
Cardinal Health
currently uses one supplier for certain raw materials used in
its manufacturing process. Cardinal Health depends on a single
supplier for guaifenesin that has the exclusive right through
July 2006 to supply guaifenesin for Mucinex SE and 90% of the
guaifenesin Cardinal Health uses in Mucinex DM, Mucinex D and
our future products. In addition, Cardinal Health depends on one
supplier for dextromethorphan HBr. During fiscal 2004, Cardinal
Health's supplier of dextromethorphan HBr notified Cardinal
Health that they will be exiting the dextromethorphan HBr
manufacturing business. At such time, Cardinal Health obtained a
commitment from the supplier to provide Cardinal Health with a
limited supply of dextromethorphan HBr. Based upon our sales of
Mucinex DM, we believe this commitment will provide us with an
adequate supply through December 2006. We are actively pursuing
secondary suppliers of dextromethorphan HBr and guaifenesin as
well as other active and inactive ingredients.
Intellectual Property
Our success depends in part on our ability to obtain and
maintain proprietary protection for our product candidates,
technology and know-how, to operate without infringing on the
proprietary rights of others and to prevent others from
infringing on our proprietary rights. We protect our proprietary
position by, among other methods, 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 also rely on trade secrets, know-how, continuing
technological innovation, and in-licensing opportunities to
develop and maintain our proprietary position.
We have been granted a U.S. patent that expires in April 2020,
which contains claims encompassing a guaifenesin product having
an immediate-release portion and an extended-release portion.
Both Mucinex SE and Humibid utilize our patented technology in a
bi-layered tablet providing both immediate and long-acting
guaifenesin to patients. The two tablet layers combine the
benefits of the fast onset of action of immediate-release
guaifenesin with the convenient dosing and reliable 12-hour
blood levels produced by the extended-release guaifenesin tablet
layer. The same bi-phasic guaifenesin release pattern also
applies to our currently-approved Mucinex products and most
likely any future combination product line extensions. None of
the extended-release prescription products for which we
performed dissolution testing met the 12-hour blood levels that
we were required to meet to obtain approval of our NDAs. The
active ingredients in our products and most of our product
candidates, including guaifenesin, dextromethorphan and
pseudoephedrine, are chemical compounds that have been in
existence for many years and, therefore, are not patentable.
We currently are seeking additional U.S. patent protection
for each of our FDA-approved products. Corresponding patent
applications have also been filed in a number of foreign
countries.
Adams,
A
Adams Respiratory Therapeutics, Humibid,
Mucinex, and Mr. Mucus are our registered trademarks or are
the subject of pending trademark applications. In addition, we
have registered Mucinex in Canada and Mexico.
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Competition
We currently compete in the OTC pharmaceutical market and we
intend to compete in the prescription market. The pharmaceutical
industry in which we operate is characterized by rapidly
advancing technologies and intense competition. Our competitors
include pharmaceutical companies, biotechnology companies,
specialty pharmaceutical and generic drug companies, academic
institutions, government agencies, and research institutions.
All of these competitors currently engage in or may engage in
the future in the development, manufacture and commercialization
of new pharmaceuticals, some of which may compete with our
present or future products.
We believe our current primary competitors in the OTC
pharmaceutical market are:
•
Pfizer, Inc. (Sudafed® and Benadryl®);
•
The Procter & Gamble Company (Dayquil® and
    Nyquil®);
•
McNeil Consumer and Specialty Pharmaceuticals, a division of
    McNeil-PPC, Inc., which is an operating company of
    Johnson & Johnson (Tylenol Cold and Flu® and
    Motrin Cold and Sinus®);
•
Wyeth (Robitussin®, Dimetapp® and Advil Cold and
    Sinus®);
•
Novartis Consumer Health, a division of Novartis AG
    (Theraflu® and Triaminic®);
•
Schering-Plough Corp. (Claritin®, Coricidin® and
    Drixoral®); and
•
Bayer AG (Alka Seltzer Plus Cold® and Aleve Cold and
    Sinus®).
In addition, we and our competitors face substantial competition
from private label brands, such as the CVS brand, which are
often less expensive.
The key competitive factors affecting the success of Mucinex are
likely to be its consumer awareness, physician and pharmacist
acceptance and price.
Properties and Facilities
Our corporate headquarters are located at 425 Main Street in
Chester, New Jersey, and are approximately 13,500 square
feet. We have entered into a long-term lease for this facility,
which expires in August 2014. Our current annual rent is
$339,525 plus expenses. However, our annual rent increases each
year of the lease. In addition, we lease approximately
8,500 square feet for our development and customer service
operations in Fort Worth, Texas. We outsource our
manufacturing and, therefore, do not own any manufacturing
facilities.
Employees
As of February 28, 2005, we had 161 employees. Thirty-four
of our employees work at our Chester facility and 11 work at our
Ft. Worth facility. One hundred thirty-three of our
employees work in sales and marketing. None of our employees are
subject to collective bargaining agreements. We consider our
relationships with our employees to be good.
Legal Proceedings
We are not currently a party to any material legal proceedings.
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MANAGEMENT AND BOARD OF DIRECTORS
The following table sets forth information about our executive
officers and directors, as of February 28, 2005.
Name
Age
Position(s)
Michael J. Valentino
50
Chief Executive Officer, President and Director
Helmut Albrecht
50
Senior Vice President, Research and Development
David Becker
38
Chief Financial Officer and Treasurer
Robert Casale
46
Vice President, Business Development and Consumer Marketing
Walter E. Riehemann
38
Vice President, General Counsel and Secretary
John S. Thievon
37
Vice President, Sales and Professional Marketing
Susan Witham
45
Vice President, Regulatory Affairs
John Q. Adams, Sr.
68
Chairman of the Board of Directors
Steven A. Elms(1)
41
Director
Donald J. Liebentritt(3)
54
Director
Joan P. Neuscheler(1)(2)
45
Director
Harold F. Oberkfell(1)(3)
58
Director
William E. Pate(2)
41
Director
Andrew N. Schiff, M.D.(2)(3)
39
Director
(1)
Member of Compensation Committee
(2)
Member of Audit Committee
(3)
Member of Nominating and Corporate Governance Committee
Executive Officers and Directors
Michael J. Valentino
has been our President, Chief
Executive Officer and a Director since 2003. Mr. Valentino
has nearly 30 years of experience in the prescription and
consumer pharmaceuticals industry. From 2002 to 2003,
Mr. Valentino served as President and Chief Operating
Officer of the Global Human Pharmaceutical Division of Alpharma
Inc. Mr. Valentino was responsible for all of
Alpharma's pharmaceutical operations in 60 countries
worldwide. From 2000 to 2002, he served as Executive Vice
President, Global Consumer Pharmaceuticals, for Novartis
International AG. Mr Valentino was responsible for global
development of Novartis's OTC products. Mr. Valentino
was Chairman of the Consumer Health Products Association in 2001
and is currently a member of its board of directors.
Mr. Valentino has been a member of the board of directors
of Myogen, Inc. since March 2005.
Helmut Albrecht, M.D.
joined us in 2004 and serves
as our Senior Vice President for Research and Development. Prior
to joining us, Dr. Albrecht was Vice President of Global
Preclinical and Clinical Development and Drug Safety at Novartis
Consumer Health from August 2003 to October 2004, and from
November 2000 to August 2003, he served as Vice President for
Research and Development for OTC (in North America). Before
joining Novartis, Dr. Albrecht held leadership positions in
the area of pharmaceutical medicine involving prescription and
OTC products as well as dietary supplements at SmithKline
Beecham Consumer Health (1996-2000), Procter & Gamble
OTC Health Care and P&G Pharmaceuticals, Altana
Pharmaceuticals (Byk Gulden Pharma Group) in Germany, and Altana
Inc. in Melville, New York. Dr. Albrecht earned a doctorate
of medicine,
magna cum laude,
from the University of
Heidelberg. He also holds a Master of Science degree in
management and policy, an advanced New York State certificate in
health care management from SUNY at Stony Brook and a diploma in
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pharmaceutical medicine. Dr. Albrecht is a fellow, as well
as a previous board member, of the Faculty of Pharmaceutical
Medicine.
David Becker
has been our Chief Financial Officer and
Treasurer since 2000 and was our interim Chief Operating Officer
from May 2003 to April 2004. Prior to joining us,
Mr. Becker was a Senior Manager in the merger and
acquisitions practice of Ernst & Young LLP from
November 1997 to September 2000. From January 1996 to November
1997, Mr. Becker served as Controller for the Salt Lake
City-based start-up company RxAmerica LLC, a pharmacy benefit
management and mail-service pharmacy operation. From 1991
to 1995, he served as a financial auditor with Ernst &
Young LLP. Mr. Becker began his professional career in 1990
as an audit and tax accountant for the southern California-based
accounting firm of Glenn M. Gelman & Associates.
Mr. Becker earned a bachelor's degree in accounting in
1990 from the University of Southern Mississippi and is a
certified public accountant and certified treasury professional.
Robert Casale
has been our Vice President, Business
Development and Consumer Marketing since 2004. Prior to joining
us, Mr. Casale was affiliated with Philosophy IB, a
management consulting firm, from May 2001 to February 2004. From
September 2000 to April 2001, Mr. Casale served as Vice
President, Business Development and Strategic Planning, for the
Consumer Healthcare Division of Pfizer Inc. and, in that
capacity, led development of a strategic plan for the newly
merged Pfizer Inc. and Warner-Lambert Company consumer
businesses. Mr. Casale began his healthcare career at
Warner-Lambert Company, where he held various positions,
including Vice President of Marketing for upper respiratory and
gastrointestinal consumer products and Global Vice President for
Warner-Lambert Company's OTC gastrointestinal and skin
care businesses from July 1993 to August 2000. Mr. Casale
received a bachelor's degree in business administration and
English from Rutgers College in 1980 and a Juris Doctorate, with
honors, from Rutgers Law School in 1983.
Walter E. Riehemann
has served as our Vice President,
General Counsel and Secretary since 2003. Prior to joining us,
he was with the international law firm of Holland &
Knight LLP from 2002 to 2003. From 2000 to 2002,
Mr. Riehemann served as President and Chief Executive
Officer of Dawson Managers, Inc., a management consulting firm
engaged in corporate restructuring and providing interim
management services to start-up and troubled companies, and from
1995 to 2000, he served in a variety of positions with RISCORP,
Inc., most recently as President and General Counsel. From 1993
to 1995, Mr. Riehemann was an associate with the law firm
of Powell Goldstein LLP. Mr. Riehemann earned a
bachelor's degree,
cum laude
, from Chadron State
College in Chadron, Nebraska, in 1987, and a Juris Doctorate,
summa cum laude
, from The Ohio State University College
of Law in 1990.
John S. Thievon
has served as our Vice President, Sales
and Professional Marketing since 2000. Prior to his current
position, Mr. Thievon held various positions with us from
January 1999 to May 2000, including Northeast Regional Business
Director and Director of Marketing. Prior to joining us,
Mr. Thievon held various positions with IMS Health
Incorporated, including Account Manager,
Account Director, and Director of Sales Training from
January 1995 to December 1998, and from 1990 to 1994, he served
as a Sales Representative with Ortho Pharmaceuticals Inc.
Mr. Thievon graduated from Pace University with a Bachelor
of Business Administration degree, with a concentration in
marketing.
Susan Witham
joined us in October 2004 and serves as our
Vice President of Regulatory Affairs. Prior to joining us,
Ms. Witham served as the Vice President, Regulatory Affairs
for Columbia Laboratories, Inc. from April 2002 to September
2004, and from September 2000 to April 2002, Ms. Witham
served as Global Regulatory Head for Marketed Products and
Practices in the Oncology and Metabolism Category at Aventis
Pharmaceuticals Corporation. From 1999 through 2000,
Ms. Witham served as Rx Director of Regulatory Affairs for
Johnson & Johnson Consumer Products Worldwide/ Ortho
Dermatological Drug Products. Previously, Ms. Witham spent
17 years at Novartis Pharmaceuticals Corporation, formerly
Sandoz Pharmaceuticals Corporation, where she held several
senior positions, including associate director of Drug
Regulatory Affairs. Ms. Witham received her Bachelor of
Science degree in biology from Bridgewater College.
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John Q. Adams, Sr.
has been a director since 1997.
He is President of J.Q. Enterprises, a holding company for his
interests in real estate and ranching. Mr. Adams has had a
long career in the pharmaceutical industry and has owned three
companies: Baylor Laboratories, sold to Norwich Eaton
Pharmaceuticals; Allerderm, Inc., sold to Virbac Inc. in France;
and Adams Laboratories, a private pharmaceutical company focused
on respiratory therapy, sold to Medeva Pharmaceuticals, where
from 1991 to 1995, Mr. Adams was a director and was also
President of Medeva Americas. He later formed our company, which
repurchased certain assets from Medeva Pharmaceuticals.
Mr. Adams served as our Chairman and Chief Executive
Officer until May 2003. He continues to serve as our Chairman
and retains memberships and board positions in several
professional and philanthropic organizations, including the
American College of Allergy and the Vanderbilt University Voice
Center. He is also an Honorary Fellow of the American Academy of
Otolaryngology-Head and Neck Surgery. Mr. Adams holds a
degree in biology from Heidelberg College.
Steven A. Elms
has been a director since 2001. He serves
as a Managing Director of Perseus-Soros Management, LLC, an
affiliate of Perseus-Soros BioPharmaceutical Fund, LP, a private
equity fund. For five years prior to joining Perseus-Soros, Mr.
Elms was a Principal in the Life Science Investment Banking
group of Hambrecht & Quist (now J.P. Morgan). His
previous healthcare sector experience includes over two years as
a pharmaceutical sales representative and as a consultant for
The Wilkerson Group. Mr. Elms serves as director of Bioenvision,
Inc. and a number of private biotechnology companies. Mr. Elms
received a M.B.A. from Northwestern's Kellogg Graduate
School of Management and a B.A. in Human Biology from Stanford
University.
Donald J. Liebentritt
has been a Director since February
2005. He has been the President of Equity Group Investments,
L.L.C., or EGI, a private investment firm, since May 2000, and
had been Executive Vice President and General Counsel of EGI
since 1997. He is also an officer and director of various
private affiliates of EGI. He is the President and a member of
the Board of Managers of Chai Trust Company, an Illinois
registered trust company. Mr. Liebentritt has been the
Chief Executive Officer and President since December 2002, a
Director since May 2002, and was a Vice President from May 2000
until December 2002, of First Capital Financial, L.L.C., a
manager of publicly held investment funds. Mr. Liebentritt
has been a director of Home Products International since
December 2004, and a director of WRS Infrastructure &
Environment, Inc., since December 2003. He has been a director
of Children's Oncology Services, Inc. since October 2003.
Mr. Liebentritt is a licensed attorney in the State of
Illinois. He received a bachelor's degree from Loyola
University of Chicago in 1972, and his law degree from the
University of Chicago in 1976.
Joan P. Neuscheler
has been a Director since 2002.
Ms. Neuscheler has 16 years of experience in private equity
investing as an officer of Tullis-Dickerson & Co., Inc., a
health care-focused venture capital firm. Since July 1998,
Ms. Neuscheler has been the President of Tullis-Dickerson
& Co., Inc. Prior to joining Tullis-Dickerson,
Ms. Neuscheler's previous experience includes three
years in public accounting with Arthur Andersen and five years
experience as Chief Financial Officer for Magnant Re
Intermediaries, Inc. Ms. Neuscheler is a Director of
Essential Group, Inc., a specialty clinical research
organization, and a number of privately held companies. She
received her B.B.A. and her M.B.A. from Pace University.
Harold F. Oberkfell
has been a director since April 2004.
Mr. Oberkfell spent 32 years of his career as an
executive with Warner-Lambert Company, retiring in June 2000.
Mr. Oberkfell was Vice President and Knowledge Management
Officer of Warner-Lambert Company from August 1998 to June 2000
and President of the company's Latin America/ Asia sector
from September 1994 to August 1998. Prior to that, he held
positions at the Parke-Davis division of Warner-Lambert Company,
including President of Parke-Davis North America and Vice
President of Marketing and Sales. His past affiliations include
the National Pharmaceutical Council Board of Directors, the
Advisory Committee for Rutgers University Business School, the
University of Medicine and Dentistry of New Jersey Foundation
Board of Trustees, and the Biomedical Services Committee of the
American Red Cross Board of Governors. Mr. Oberkfell
currently serves on the Board of Directors of Avanir
Pharmaceuticals, Inc.
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William E. Pate
has been a director since 2000.
Mr. Pate is a Managing Director of Equity Group
Investments, L.L.C. (EGI), a privately-held investment firm.
Mr. Pate has been employed by EGI or its predecessor in
various capacities since 1994. Prior to his tenure at EGI, he
was an associate at the Blackstone Group and in the mergers and
acquisitions group of Credit Suisse First Boston. Mr. Pate
serves as the Chairman of the Board of Directors of Danielson
Holding Corporation and serves as a member of the board of
directors of certain private affiliates of EGI. He received a
Juris Doctorate degree from the University of Chicago Law School
and a Bachelors of Arts degree from Harvard College.
Andrew N. Schiff, M.D.
has been a director since 2001.
Dr. Schiff joined Perseus-Soros Management, LLC, an
affiliate of Perseus-Soros Biopharmaceutical Fund, LP, a private
equity firm, in September of 1999 and currently serves as a
Managing Director. Over the last 10 years, Dr. Schiff
has practiced internal medicine at The New York Presbyterian
Hospital, where he maintains his position as a Clinical
Assistant Professor of Medicine. He currently serves as a
director of Bioenvision, Inc., Myogen, Inc. and Barrier
Therapeutics, Inc. Dr. Schiff received his Doctorate of
Medicine from Cornell University Medical College and his M.B.A.
from Columbia University. His bachelor's degree in
neuroscience was awarded with honors by Brown University.
Election of Officers
Our board of directors elects our officers on an annual basis
and our officers serve until their successors are duly elected
and qualified. There are no family relationships among any of
our officers or directors.
Committees of the Board of Directors
Our board currently has three committees: the audit committee,
the compensation committee, and the nominating/corporate
governance committee.
We believe that our audit and compensation committees will meet
the current requirements of the Sarbanes-Oxley Act of 2002 as
they become applicable to us and that our nominating committee
will meet the current requirements of the Nasdaq National Market
rules and regulations as they become applicable to us. Under
current SEC and Nasdaq National Market rules and regulations,
within one year of effectiveness only independent directors may
serve on audit, compensation and nominating committees. Each
member of the compensation and nominating and corporate
governance committees meets the definition of independence
established by the Nasdaq National Market. Ms. Neuscheler meets
the SEC and Nasdaq definitions of independence for membership on
the audit committee. The audit committee, compensation committee
and nominating committee will adopt written charters that will
be available on our website prior to completion of the offering.
Audit Committee.
Our audit committee's
responsibilities include:
•
appointing a firm to serve as independent auditor to audit our
    financial statements;
•
discussing the scope and results of the audit with the
    independent auditor, and reviews with management and the
    independent accountant our interim and year-end operating
    results;
•
considering the adequacy of our internal accounting controls and
    audit procedures; and
•
approving (or, as permitted, pre-approves) all audit and
    non-audit services to be performed by the independent auditor.
The audit committee has the sole and direct responsibility for
appointing, evaluating and retaining our independent auditors
and for overseeing their work. All audit services and all
non-audit services, other than de minimis non-audit services, to
be provided to us by our independent auditors must be approved
in advance by our audit committee.
The members of our audit committee are William Pate,
Dr. Andrew Schiff and Joan Neuscheler. The board of
directors has determined that Ms. Neuscheler is an
"audit committee financial expert" as
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such term is defined in Item 401(h) of Regulation S-K.
Dr. Schiff will serve as chairperson of the audit committee.
Compensation Committee.
Our compensation committee's
responsibilities include:
•
reviewing and recommending approval of compensation of our
    executive officers;
•
administering our stock incentive and employee stock purchase
    plans;
•
reviewing and making recommendations to our board with respect
    to incentive compensation and equity plans;
•
evaluating our Chief Executive Officer's performance in
    light of corporate objectives; and
•
setting our Chief Executive Officer's compensation based on
    the achievement of corporate objectives.
The members of our compensation committee are Steve Elms, Joan
Neuscheler and Harold Oberkfell. Ms. Neuscheler will serve
as the chairperson of the compensation committee.
Nominating and Corporate Governance Committee.
Our
nominating and corporate governance committee identifies,
evaluates and recommends nominees to our board of directors and
committees of our board of directors, conducts searches for
appropriate directors and evaluates the performance of our board
of directors and of individual directors. The nominating and
corporate governance committee is also responsible for reviewing
developments in corporate governance practices, evaluating the
adequacy of our corporate governance practices and reporting and
making recommendations to the board concerning corporate
governance matters.
The members of our nominating and corporate governance committee
are Donald Liebentritt, Dr. Andrew Schiff and Harold Oberkfell.
Mr. Oberkfell will serve as chairperson of the nominating
and corporate governance committee and as our lead independent
director.
Election of Directors
In accordance with the terms of our certificate of
incorporation, our board of the directors is divided into three
classes:
•
Class I, whose term will expire at the annual meeting of
    stockholders to be held in fiscal year 2006;
•
Class II, whose term will expire at the annual meeting of
    stockholders to be held in fiscal year 2007; and
•
Class III, whose term will expire at the annual meeting of
    stockholders to be held in fiscal year 2008.
The Class I directors will be Donald Liebentritt, John
Adams, Sr. and Dr. Andrew Schiff, the Class II directors
will be Steve Elms, Joan Neuscheler and William Pate, and the
Class III directors will be Harold Oberkfell and Michael
Valentino. At each annual meeting of stockholders, or special
meeting in lieu thereof, after the initial classification of the
board of directors, the successors to directors whose terms will
then expire will be elected to serve from the time of election
and qualification until the third annual meeting following
election or special meeting held in lieu thereof. The number of
directors may be changed only by resolution of the board of
directors or a super-majority vote of the stockholders. Any
additional directorships resulting from an increase in the
number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes
in control of management.
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Director Compensation
Prior to this offering, Harold Oberkfell and John Q. Adams,
Sr. were the only directors who received compensation for their
services as director. Harold Oberkfell received $3,000 per
board meeting and was awarded a one-time grant of options to
acquire 50,000 shares of common stock at an exercise price
of $0.78. The option vests ratably over a five year period.
Through October 2004, John Q. Adams, Sr. received
$20,448 per month for his service as Chairman of the Board of
Directors. We pay the lease payment, insurance and taxes on his
automobile. In addition, all the options he held as of
April 30, 2003 to acquire shares of our common stock under
our Long Term Incentive Plan vested.
On           ,
the compensation committee of our board of directors adopted a
compensation program for independent directors. Pursuant to this
program, each independent director will receive a
$          annual
retainer as well as
$          for
each board meeting attended in person
($          for
meetings attended by video or telephone conference). The
chairperson of the compensation committee and the nominating and
corporate governance committee will receive
$          for
each committee meeting attended in person
($          for
meetings attended by video or telephone conference), and the
chairperson of the audit committee will receive
$          for
each committee meeting attended in person
($          for
meetings attended by video or telephone conference).
Under the director compensation program adopted
on           ,
independent directors will also receive equity incentives. Each
independent director who joins our board of directors
after           will
receive a nonstatutory stock option exercisable
for            shares
of common stock with an exercise price equal to the then fair
market value per share of our common stock. This stock option
will vest in two equal annual installments
of                      shares
on the first and second anniversaries of his or her date of
election or appointment to our board of directors.
On           ,
we granted each
of           ,
the current independent directors, a fully-vested nonstatutory
stock option exercisable
for            shares
of common stock with an exercise price of $ per share. In
addition, at each annual meeting beginning
in           ,
each independent director will receive a fully-vested
nonstatutory stock option exercisable
for            shares
of common stock with an exercise price equal to the then fair
market value per share of our common stock. Options granted
under the director compensation program will not be exercisable
before           and
will have a term of 10 years.
Compensation Committee Interlocks and Insider
Participation
During fiscal 2004, Steven A. Elms, Joan P. Neuscheler and
William E. Pate served on the compensation committee of the
board of directors. None of the compensation committee members
was formerly or during fiscal 2004 an officer or employed by us.
No executive officer 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.
Corporate Governance
Prior to the completion of this offering, our board will adopt
procedures and policies to comply with the Sarbanes-Oxley Act of
2002 and the rules adopted by the SEC and the Nasdaq National
Market, including a code of conduct and ethics applicable to our
officers, directors and employees. Upon completion of this
offering, our code of conduct and ethics will be available on
our website.
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Executive Compensation
The following table sets forth all compensation awarded to,
earned by or paid to our chief executive officer and the four
other highest paid executive officers for the fiscal year ended
June 30, 2004. We refer to these officers collectively as
our "named executive officers".
Summary Compensation Table
Long-Term
Compensation
Annual Compensation
Awards
Other
Securities
Annual
Underlying
Name and Principal Position
Year
Salary
Bonus
Compensation
Options
Michael J. Valentino
2004
$
335,336
$
750,000
—
3,893,818
Chief Executive Officer, President and Director
Mark Gainor(1)
2004
83,333
—
—
Former Chief Executive Officer, President and Director
David Becker
2004
194,226
226,000
—
175,000
Chief Financial Officer
John Thievon
2004
161,397
163,000
—
245,000
Vice President Sales and Professional Marketing
Walter E. Riehemann
2004
170,923
163,000
—
350,000
Vice President, General Counsel and Secretary
Robert Casale(2)
2004
75,000
75,000
—
350,000
Vice President Business Development and Consumer Marketing
(1)
Mr. Gainor served as our interim Chief Executive Officer
    and President until August 2003 and served on our board of
    directors until January 2005.
(2)
Mr. Casale began as our Vice President Business Development
    and Consumer Marketing in March 2004.
Option Grants in Last Fiscal Year
The following table lists each grant of stock options during
fiscal year 2004 to the named executive officers. No stock
appreciation rights have been granted to these individuals.
Individual Grants
Potential Realizable
Value at Assumed
Number of
Percent of
Annual Rates of Stock
Securities
Total Options
Price Appreciation for
Underlying
Granted to
Option Term(3)
Options
Employees in
Exercise
Expiration
Name
Granted
Fiscal Year(1)
Price(2)
Date
5%
10%
Michael J. Valentino
3,893,818
65.65
%
$
0.14
08/11/2013
$
$
Mark Gainor
—
—
—
—
David Becker
175,000
2.95
0.50
1/27/2014
John Thievon
45,000
0.76
0.14
10/22/2013
200,000
3.37
0.50
1/27/2014
Walter E. Riehemann
275,000
4.64
0.14
9/22/2013
75,000
1.26
0.50
1/27/2014
Robert Casale
350,000
5.90
0.50
3/01/2014
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(1)
The figures representing percentages of total options granted to
    employees in the last fiscal year are based on a total of
    5,930,938 shares underlying options granted to our
    employees during fiscal year 2004.
(2)
The exercise price of each option granted was equal to the fair
    market value of our common stock as valued by our board of
    directors on the date of grant. The exercise price may be paid
    in cash, in shares of our common stock valued at fair market
    value on the exercise date or through a cashless exercise
    procedure involving a same-day sale of the purchased shares.
(3)
The amounts shown in the table above as potential realizable
    value represent hypothetical gains that could be achieved for
    the respective options if exercised at the end of the option
    term. These amounts represent assumed rates of appreciation in
    the value of our common stock from the fair market value on the
    date of grant. Potential realizable values in the table above
    are calculated by:
•
Multiplying the number of shares of our common stock subject to
    the option by the assumed initial public offering price per
    share of $        .
•
Assuming that the aggregate stock value derived from that
    calculation compounds at the annual 5% or 10% rates shown in the
    table for the balance of the term of the option.
•
Subtracting from that result the total option exercise price.
The 5% and 10% assumed rates of appreciation are suggested by
the rules of the SEC and do not represent our estimate or
projection of the future common stock price. Actual gains, if
any, on stock option exercises will be dependent on the future
performance of our common stock.
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
The following table sets forth the number of vested and unvested
shares covered by options as of June 30, 2004 and the
year-end value of options as of June 30, 2004 for the named
executive officers. No options were exercised by our named
executive officers in 2004.
Number of Securities
Value of Unexercised
Underlying Unexercised
In-the-Money
Options at June 30, 2004
Options at June 30, 2004(1)
Name
Exercisable
Unexercisable
Exercisable
Unexercisable
Michael J. Valentino
1,427,863
2,465,955
$
$
Mark Gainor
—
—
—
—
David Becker
160,000
290,000
John Thievon
83,000
267,000
Walter E. Riehemann
—
350,000
Robert Casale
17,503
332,497
(1)
Amounts presented under the caption "Value of Unexercised
    in-the-Money Options at June 30, 2004" are based on
    the assumed initial public offering price of
    $        per share minus
    the exercise price, multiplied by the number of shares subject
    to the stock option, without taking into account any taxes that
    might be payable in connection with the transaction.
Employment Agreement with Mr. Valentino
We employ Mr. Valentino as our Chief Executive Officer and
President pursuant to an employment agreement effective
August 11, 2003. The employment agreement provides for a
five year term of employment, subject to automatic renewals for
additional one-year periods. However, either we or
Mr. Valentino may cause the agreement to cease to extend
automatically by giving notice to the other party within six
months prior to the expiration of the term.
Under the agreement, Mr. Valentino receives a base salary
of $31,250 per month, annualized to $375,000, subject to
increases upon an annual review by our board of directors. The
employment agreement also provides that Mr. Valentino is
entitled to participate in all benefit programs, including
insurance and retirement plans, available to members of the
executive management team. The agreement further provides for:
•
a discretionary annual target bonus based on
    Mr. Valentino's performance and our business results,
    as determined by our board of directors, equal to at least 100%
    of his base salary but no more than 150% of his base salary if
    he meets specified performance objectives;
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•
a transaction bonus, not to exceed $2,500,000, equal to 2.0% of
    the transaction price if we carry out a specified corporate
    transaction, including a merger or consolidation or the sale,
    transfer or other disposition of a substantial portion of our
    assets; and
•
the grant of stock options to acquire 3,893,818 shares of
    common stock, which he is entitled to require us to register for
    sale under the Securities Act.
Under the employment agreement, either we or Mr. Valentino
may terminate his employment at any time. The employment
agreement also terminates upon the death or disability of
Mr. Valentino. Upon termination, Mr. Valentino will
receive any amounts earned or due but unpaid through the date of
termination, including base salary and benefits. Additionally,
if Mr. Valentino voluntarily resigns, other than for good
reason or disability, he may exercise his vested stock options
for three months following the date he terminates his
employment. If the agreement terminates by reason of death or
disability, Mr. Valentino (or his estate, as the case may
be) will be entitled to continued exercisability of his vested
stock options for one year following his death or, upon
disability, for the remainder of their original terms. He is
also entitled to continued benefits that may apply, a prorated
target bonus and, in the event of a specified transaction
occurring within nine months of termination due to disability, a
transaction bonus.
However, if we terminate his employment without cause or if
Mr. Valentino terminates his employment for good reason,
Mr. Valentino has the right to receive an additional
payment equal to two times the sum of his base salary plus his
target discretionary bonus, a transaction bonus if a specified
transaction occurs within nine months after termination and the
right to the continued exercisability of his vested stock
options for the remainder of their original terms.
Confidentiality and Noncompetition Agreement
As of August 11, 2003, we have also entered into a
confidentiality and noncompetition agreement with
Mr. Valentino. Under this agreement, Mr. Valentino
agrees not to disclose confidential information and, for a
period of 24 months following the termination of
Mr. Valentino's employment, not to compete with us or
recruit our employees.
Termination and Change of Control Agreements
We have entered into income security agreements with David
Becker, Helmut Albrecht, Walter Riehemann, John Thievon, Robert
Casale, and Susan Witham. If we terminate any of these
individuals without cause or if any of these individuals resigns
for good reason (as defined in the agreements) within one year
after a change in control, he or she will receive severance
benefits in an amount equal to his or her earned but unpaid
salary, any awarded but unpaid bonus from the previous fiscal
year and one year of annual base salary. In addition, the
individual and his or her dependents will continue to receive
health benefits for one year following the date of termination.
The income security agreements also provide that these
individuals agree not to disclose confidential information or
for one year after termination, compete with us or recruit our
employees.
Equity Benefit Plans
1999 Long-Term Incentive Plan
On July 21, 1999, our board of directors adopted our 1999
Long-Term Incentive Plan, which has been approved by our
stockholders.
Purpose.
The plan provides incentives to employees for
the purpose of attracting able persons to become employees and
encouraging employees to continue their employment and to
contribute to our growth and success.
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Form of Awards.
The incentive plan authorizes the
granting of awards to employees and consultants in the following
forms:
•
options to purchase shares of our common stock, which may be
    nonstatutory stock options or incentive stock options under
    section 422(b) of the Internal Revenue Code of 1986, as
    amended; and
•
restricted stock, which is subject to restrictions on
    transferability and other restrictions set by the board of
    directors.
All awards must be evidenced by a written award agreement, which
will include the provisions specified by the board of directors.
Authorized Shares.
The number of shares reserved and
available for issuance under the incentive plan is
11,500,000 shares. In the event of a subdivision or
consolidation of stock, payment of a stock dividend,
recapitalization, or other change in outstanding common stock,
the share authorization limits described above will be adjusted
proportionately, and the board of directors may adjust awards to
preserve their benefits or potential benefits.
In the event that any outstanding award for any reason is
cancelled or forfeited, terminates, expires or lapses, any
shares subject to the award will again be available for issuance
under the incentive plan, subject to the board's
discretion. If a participant pays the exercise price of an
option by delivering to us previously owned shares, only the
number of shares we issue in excess of the surrendered shares
will count against the incentive plan's share limit. In
addition, if shares that would be acquired upon exercise of an
award are withheld to pay the exercise price of the award, only
the net number of shares actually issued upon exercise will
count against the incentive plan's share limit.
Administration.
The incentive plan is administered by the
board of directors, which has the authority to:
•
designate participants;
•
determine the type and size of awards to be granted to each
    participant and the terms, conditions and restrictions of awards;
•
establish, adopt or revise any rules, regulations or guidelines
    to administer the incentive plan; and
•
take all other actions necessary or advisable to operate or
    administer the plan.
Our board of directors may also delegate its responsibility and
authority to administer the incentive plan to a committee
appointed by the board. One member of the committee, however,
will be appointed by and serve at the pleasure of S.Z.
Investments, L.L.C., an affiliate of EGI, one of our principal
stockholders.
Stock Options.
The board of directors will determine the
term and conditions of each stock option. In the case of
incentive stock options, to the extent that the aggregate fair
market value of our common stock with respect to which incentive
stock options may be exercisable for the first time by an
awardee during any calendar year under all of our plans exceeds
$100,000, the incentive stock options will be treated as
nonqualified stock options. Additionally, any incentive stock
option granted to a holder of 10% or more of the combined voting
power of all classes of our stock must (a) have an option
price of at least 110% of the fair market value of the common
stock subject to the option and (b) not be exercisable
after five years from the date of the grant. Only employees are
eligible to receive incentive stock options and no incentive
stock options may be granted after July 21, 2009.
Unless otherwise provided in an award agreement, the following
termination provisions apply with respect to an option award:
•
upon the death, disability or retirement of a participant, all
    of his or her outstanding options may be exercised, to the
    extent then vested, no more than one year after such termination;
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•
if a participant's employment is terminated without cause,
    all of his or her outstanding options may be exercised, to the
    extent then vested, no more than three months from the date of
    termination;
•
if a participant resigns from employment, all of his or her
    outstanding options may be exercised, to the extent then vested,
    no more than 30 days from the date of termination; and
•
if a participant is terminated for cause, he or she forfeits all
    outstanding options and the right to exercise such options,
    regardless of their vested status.
Restricted Stock.
The board of directors, in its sole
discretion, determines the restriction period applicable to any
award of restricted stock. However, such restriction period
generally lasts for five years, with the period expiring each
year for 20% of the shares awarded.
A recipient of a restricted stock award has the right to receive
dividends, to vote his or her restricted shares and to enjoy
other stockholder rights during the restriction period. However,
the participant may not sell, assign, transfer, pledge, or
otherwise dispose of the restricted stock during the restriction
period. In addition, the board of directors may prescribe
additional terms, conditions, restrictions, and limitations
applicable to an award of restricted stock at the time of such
award.
Corporate Transactions.
In the event of a corporate
transaction involving us, including specified mergers, reverse
mergers or the sale of all or substantially all of our assets,
each outstanding option becomes exercisable in full, all stock
restrictions are deemed satisfied and we have the right to
cancel any and all outstanding options by a cash payment.
Termination.
Our board of directors may at any time
suspend, terminate or amend the incentive plan without
stockholder approval. However, any amendment is subject to
stockholder approval if the amendment increases the maximum
number of shares available under the incentive plan or changes
the class of participants eligible to participate in the
incentive plan.
Upon termination of the plan, the plan's terms and
provisions will continue to apply to awards granted prior to the
termination. No termination or amendment of the incentive plan
may materially adversely affect an award previously granted
under the plan without the consent of the participant holding
such award.
Adams Laboratories, Inc. Retirement Savings Plan
Since January 1, 2004, we have maintained the Adams
Laboratories, Inc. Retirement Savings Plan, which is a 401(k)
tax-qualified, defined contribution plan subject to regulation
under the Employee Retirement Income Security Act of 1974, or
ERISA. Each plan year, we may make employer matching
contributions, contribute a uniform percentage of salary or make
an employer profit-sharing contribution, in our discretion.
Limitation of Liability and Indemnification of Officers and
Directors
Upon the closing of this offering, we will reincorporate in the
State of Delaware and adopt and file a certificate of
incorporation and bylaws. Our certificate of incorporation and
bylaws will provide that we will indemnify our directors and
officers to the fullest extent permitted by Delaware law, as it
now exists or may in the future be amended, against all expenses
and liabilities reasonably incurred in connection with their
service for or on behalf of us. In addition, the certificate of
incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their
fiduciary duty as directors, unless they violated their duty of
loyalty to us or our stockholders, acted in bad faith, knowingly
or intentionally violated the law, authorized illegal dividends
or redemptions, or derived an improper personal benefit from
their action as directors. We maintain liability insurance that
insures our directors and officers against certain losses and
that insures us against our obligations to indemnify our
directors and officers.
In addition, we have entered into indemnification agreements
with each of our directors and officers. These agreements, among
other things, require us to indemnify each director and officer
to the
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fullest extent permitted by Delaware law, including
indemnification of expenses such as attorneys' fees,
judgments, fines, and settlement amounts incurred by the
director or officer in any action or proceeding, including any
action or proceeding by or in right of us, arising out of the
person's services as a director or officer. At present, we
are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees,
or agents in which indemnification would be required or
permitted. We believe provisions in our certificate of
incorporation and indemnification agreements are necessary to
attract and retain qualified persons as directors and officers.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock, as of
February 28, 2005, by the following individuals or groups:
•
Each of our directors;
•
Each of our named executive officers;
•
All of our directors and executive officers as a group;
•
Each person, or group of affiliated persons, whom we know
    beneficially owns more than 5% of our outstanding common stock;
    and
•
Each of our stockholders selling shares in this offering.
Except as indicated by footnote, and except for community
property laws where applicable, we believe, based on information
provided to us, that the persons named in the table below have
sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. Beneficial
ownership is determined in accordance with the rules of the SEC.
The percentage of beneficial ownership before the offering is
based on 65,471,605 shares of common stock deemed outstanding as
of February 28, 2005, after giving effect to the conversion
of our Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock into our common stock in
connection with this offering.
Before Offering
After Offering
Number of
Shares
Number of
Name and Address(1)
Shares(2)
Percent
Offered
Shares(2)
Percent
Directors and Executive Officers:
Michael J. Valentino(3)
2,076,962
3.07
%
David Becker(4)
261,351
*
Robert Casale(5)
75,848
*
Walter E. Riehemann(6)
70,000
*
John Thievon(7)
155,530
*
John Q. Adams, Sr.(8)
3,999,790
6.05
Steven A. Elms(9)
—
—
Mark Gainor(10)
1,262,391
1.92
Donald J. Liebentritt(11)
—
—
Joan P. Neuscheler(12)
6,512,669
9.90
Harold F. Oberkfell(13)
10,000
*
William E. Pate(14)
—
—
Andrew N. Schiff, M.D.(15)
—
—
All Directors and Executive Officers as a group (15 persons)(16)
14,424,541
20.79
5% Stockholders:
EGI(17)
22,482,985
34.08
Tullis-Dickerson & Co., Inc.(18)
6,512,669
9.90
Perseus-Soros BioPharmaceutical Fund, LP(19)
19,080,826
26.93
Talon Opportunity Fund, L.P.(20)
4,162,799
6.34
Marquette Venture Partners(21)
4,124,137
6.29
John Adams, Jr.(22)
3,557,656
5.40
Selling Stockholders:
*
Less than 1%.
(1)
Unless otherwise specified, the address of each beneficial owner
    listed in the table below is c/o Adams Laboratories, Inc.
    425 Main Street, Chester, New Jersey 07920.
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(2)
Beneficial ownership is determined in accordance with
    Rule 13d-3 of the Exchange Act and generally includes
    voting and investment power with respect to securities, subject
    to community property laws, where applicable.
(3)
Includes 2,076,962 shares subject to stock options
    currently exercisable or exercisable within 60 days of
    February 28, 2005.
(4)
Includes: (i) 250,000 shares subject to stock options
    currently exercisable or exercisable within 60 days of
    February 28, 2005 and (ii) 2,088 currently exercisable
    warrants to purchase common stock.
(5)
Includes 75,848 shares subject to stock options currently
    exercisable or exercisable within 60 days of
    February 28, 2005.
(6)
Includes 70,000 shares subject to stock options currently
    exercisable or exercisable within 60 days of
    February 28, 2005.
(7)
Includes (i) 153,000 shares subject to stock options
    currently exercisable or exercisable within 60 days of
    February 28, 2005 and (ii) 456 currently exercisable
    warrants to purchase common stock.
(8)
Includes (i) 656,250 shares subject to stock options
    currently exercisable or exercisable within 60 days of
    February 28, 2005 and (ii) 363,763 shares of common
    stock that are held by A&B Investment Partnership, of which
    Mr. Adams, Sr. is a partner and controls 50% of such entity.
(9)
Steven A. Elms is a managing director of Perseus-Soros
    Management, LLC, an affiliate of Perseus-Soros BioPharmaceutical
    Fund, LP, or PSBF. Mr. Elms does not have voting or
    dispositive power with respect to any of the shares owned by
    PSBF.
(10)
Includes 289,425 currently exercisable warrants to purchase
    common stock held by MJG Partners, L.P. (MJG Partners), a
    partnership controlled by Mr. Gainor. MJG Partners directly
    owns the listed shares. Mr. Gainor previously served as our
    Chief Executive Officer and President and was a member of our
    board of directors.
(11)
Donald J. Liebentritt is President of Equity Group Investments,
    L.L.C. or EGI. Mr. Liebentritt does not have voting or
    dispositive power with respect to any of the shares owned by EGI.
(12)
Includes: (i) 1,897,371 shares of common stock and 125,000
    currently exercisable warrants to purchase common stock held by
    TD Origen Capital Fund, L.P.; (ii) 1,202,718 shares of
    common stock and 31,250 currently exercisable warrants to
    purchase common stock held by TD Lighthouse Capital
    Fund, L.P.; and (iii) 3,100,080 shares of common stock
    and 156,250 currently exercisable warrants to purchase common
    stock held by Tullis-Dickerson Capital Focus III, L.P.
    TD Origen Capital Fund, L.P., TD Lighthouse
    Capital Fund, L.P. and Tullis-Dickerson Capital Focus
    III, L.P. are each under the common management of
    Tullis-Dickerson & Co., Inc. of which
    Ms. Neuscheler is the President. Ms. Neuscheler
    disclaims beneficial ownership of the listed shares, except to
    the extent of her proportionate pecuniary interest therein.
(13)
Includes 10,000 shares subject to stock options currently
    exercisable or exercisable within 60 days of
    February 28, 2005.
(14)
William E. Pate is a managing director of EGI. Mr. Pate
    does not have voting or dispositive power with respect to any of
    the shares owned by EGI.
(15)
Dr. Andrew Schiff is a managing director of Pereus-Soros
    Management, LLC, an affiliate of PSBF. Dr. Schiff does not
    have voting or dispositive power with respect to any of the
    shares owned by PSBF.
(16)
Includes an aggregate of: (i) 3,292,060 shares subject to
    options that are exercisable within 60 days of
    February 28, 2005; and (ii) 820,820 currently
    exercisable warrants to purchase common stock.
(17)
Includes: (i) 5,982,758 shares of common stock held by
    EGI-Fund (99), L.L.C.; 4,189,655 shares of common stock held by
    EGI-Fund (00) Investors, L.L.C.; 1,016,969 shares of common
    stock and 216,351 currently exercisable warrants to purchase
    common stock held by EGI-Fund (01) Investors, L.L.C.; and
    9,814,861 shares of common stock held by EGI-Fund (02-04); and
    (ii) 972,966 shares of common stock and 289,425 currently
    exercisable warrants to purchase common stock owned directly by
    MJG Partners with respect to which EGI-Fund (99) Investors,
    L.L.C. may contractually direct the exercise of voting power but
    as to which such entity disclaims beneficial ownership. The
    address of EGI is 2 N. Riverside Plaza, 6th Floor, Chicago,
    Illinois 60606.
(18)
Includes: (i) 1,897,371 shares of common stock and 125,000
    currently exercisable warrants to purchase common stock held by
    TD Origen Capital Fund, L.P.; (ii) 1,202,718 shares of
    common stock and 31,250 currently exercisable warrants to
    purchase common stock held by TD Lighthouse Capital Fund, L.P.;
    and (iii) 3,100,080 shares of common stock and 156,250
    currently exercisable warrants to purchase common stock held by
    Tullis-Dickerson Capital Focus III, L.P. TD Origen Capital Fund,
    L.P., TD Lighthouse Capital Fund, L.P. and Tullis-Dickerson
    Capital Focus III, L.P. are each managed by Tullis-Dickerson
    & Co., Inc. The address of Tullis-Dickerson & Co.,
    Inc. is 2 Greenwich Plaza, 4th Floor, Greenwich,
    Connecticut 06830.
(19)
Includes 5,375,996 currently exercisable warrants to purchase
    common stock. Perseus-Soros Partners, LLC is the general partner
    of the Perseus-Soros BioPharmaceutical Fund, LP. Perseus BioTech
    Fund Partners, LLC and SFM Participation, L.P. are the
    managing members of Perseus-Soros Partners, LLC. Perseuspur, LLC
    is the managing member of Perseus BioTech Fund Partners,
    LLC. Frank Pearl is the sole member of Perseuspur, LLC and in
    such capacity may be deemed a beneficial owner of securities
    held for the account of the Perseus-Soros BioPharmaceutical
    Fund, LP. SFM AH, LLC is the general partner of SFM
    Participation, L.P. The sole managing member of SFM AH, LLC is
    Soros Fund Management LLC. George Soros is the Chairman of
    Soros Fund Management LLC and in such capacity may be
    deemed a beneficial owner of securities
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held for the account of the
    Perseus-Soros BioPharmaceutical Fund, LP. The address of
    Perseus-Soros BioPharmaceutical Fund, LP is 888 Seventh Avenue,
    29th Floor, New York, New York 10106.
(20)
Includes: (i) 1,090,126 shares
    of common stock held by Talon Adams, LLC; and
    (ii) 2,925,441 shares of common stock and 147,232 currently
    exercisable warrants to purchase common stock held by Talon
    Opportunity Fund, L.P. Talon Adams, LLC and Talon Opportunity
    Fund, L.P., are investment partnerships managed by Talon
    Partnership Management, LLC, an entity affiliated with Talon
    Asset Management, Inc. The address of Talon Opportunity Fund,
    L.P. is One North Franklin, Suite 900, Chicago, Illinois
    60606.
(21)
Includes: (i) 2,672,759 shares
    of common stock and 50,908 currently exercisable warrants to
    purchase common stock held by Marquette Venture Partners III,
    L.P.; and 1,400,470 shares of common stock held by Marquette
    Venture Partners Support Fund, L.P. Marquette Venture Partners
    III, L.P. and Marquette Venture Partners Support Fund, L.P. are
    wholly-owned subsidiaries of Marquette Venture Partners. The
    address of Marquette Venture Partners is 676 N. Michigan
    Avenue, Chicago, Illinois 60611.
(22)
Includes: (i) 380,938 shares
    subject to stock options currently exercisable or exercisable
    within 60 days of February 28, 2005; (ii) 36,893
    shares of common stock held in trust for John Q. Adams, III of
    which Mr. Adams, Jr. is a co-trustee;
    (iii) 36,893 shares of common stock held in trust for
    Jessica Nicole Adams of which Mr. Adams, Jr. is a
    co-trustee; (iv) 30,000 shares of common stock held in
    trust for Amanda J. Milner of which Mr. Adams, Jr. is a
    co-trustee; and (v) 73,793 shares of common stock held in
    trust for John Q. Adams, Jr. John Adams, Jr. is the son of John
    Adams, Sr. and served as our President until June 2003. The
    address of John Q. Adams, Jr. is 2350 Airport Freeway,
    Suite 222, Bedford, Texas 76022.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Private Placements of Securities to Related Parties
On July 9, 2001, we issued an aggregate of 16,129,197
shares of Series B Preferred Stock at a price of $1.60 per
share and warrants to purchase an aggregate of 2,655,734 shares
of Series B Preferred Stock at an exercise price of $1.60.
All shares of our Series B Preferred Stock will
automatically convert into an aggregate of 16,129,197 shares of
common stock and the warrants to purchase Series B
Preferred Stock will automatically become warrants to purchase
2,655,734 shares of common stock upon the closing of this
offering.
Between November 2002 and August 2003, we issued an aggregate of
$21,134,998 in 8% Convertible Notes and Bridge Notes together
with warrants to purchase an aggregate of 14,153,125 shares
of common stock at an exercise price of $0.01 per share. These
notes converted into shares of Series C Preferred Stock.
All shares of our Series C Preferred Stock will
automatically convert into an aggregate of 13,814,937 shares of
common stock.
The following table summarizes the participation by our five
percent stockholders in these private placements.
Warrants
Aggregate
for
Consideration
Warrants for
Series C
Common
Purchaser(1)
Paid
Series B Stock
Series B Stock
Stock
Stock
EGI(2)
$
9,518,253
865,406
216,351
4,836,034
4,978,827
Perseus-Soros Biopharmaceutical Fund, LP
23,472,114
9,375,000
937,500
4,329,830
4,438,496
Tullis-Dickerson(3)
7,949,104
3,125,000
312,500
1,520,976
1,554,193
Talon Opportunity(4)
3,011,866
851,430
147,232
878,086
906,740
Marquette Venture Partners(5)
1,488,549
203,632
50,908
671,245
729,225
(1)
See "Principal and Selling Stockholders" for more
    information on shares held by certain of these purchasers.
(2)
Includes EGI-Fund (01) Investors, L.L.C., and EGI-Fund
    (02-04) Investors, L.L.C.
(3)
Includes Tullis-Dickerson Capital Focus III, L.P., TD Origen
    Capital Fund, L.P. and TD Lighthouse Capital Fund, L.P.
(4)
Includes Talon Opportunity Fund, L.P. and Talon Adams, LLC
(5)
Includes Marquette Venture Partners III, L.P. and MVP III
    Support Fund, L.P.
In connection with these private placements, we entered into
agreements with our investors providing for registration rights
with respect to the shares sold in these transactions. See
"Description of Capital Stock – Registration
Rights of Stockholders." In addition, in connection with
the above transactions, we also entered into stockholders
agreements with all of the investors participating therein
providing for, among other things, restrictions on transfer,
rights of first refusal, co-sale rights, and rights to elect
directors. These stockholders agreements and the rights
described above shall terminate upon closing of this offering.
Employment Agreements
We have entered into an employment agreement with
Mr. Valentino. See "Management and Board of
Directors – Employment Agreement with
Mr. Valentino."
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Income Security Agreements
We have entered into income security agreements with each of
David P. Becker, Helmut H. Albrecht, Robert Casale, Walter E.
Riehemann, John Thievon, and Susan Witham. See "Management
and Board of Directors – Termination and Change of
Control Agreements."
Separation Agreement
We have entered into a separation and independent advisor
agreement with John Q. Adams, Sr., a director and the founder of
our company. Mr. Adams resigned his position as Chief
Executive Officer as of April 30, 2003. We retained him as
a consultant through October 2004 and paid him $20,448 per
month. We pay the lease payment, insurance and taxes on his
automobile. In addition, all the options he held as of
April 30, 2003 to acquire shares of our common stock under
our Long Term Incentive Plan vested.
Indemnification Agreements
We have entered into indemnification agreements with each of our
directors and officers. See "Management and Board of
Directors – Limitation of Liability and
Indemnification of Officers and Directors."
Stock Option Grants
We have granted options to purchase shares of our common stock
to our executive officers and directors. See "Management
and Board of Directors – Director Compensation,"
"Management and Board of Directors – Executive
Compensation" and "Management and Board of
Directors – Option Grants in Last Fiscal Year."
Director Compensation
Please see "Management and Board of Directors –
Director Compensation" for a discussion of payments made
and options granted to our directors.
Participation in Reserved Share Program
We expect
that                     will
purchase                     shares
in the reserved share program. Please see
"Underwriting – Reserved Shares" for more
information regarding the reserved share program.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock
will consist
of                     shares
of common stock,
$                    par
value,
and                     shares
of preferred stock,
$                    par
value. The following description summarizes important terms of
our capital stock. Because it is only a summary, it does not
contain all the information that may be important to you. For a
complete description, you should refer to our certificate of
incorporation and bylaws, copies of which have been filed as
exhibits to the registration statement of which this prospectus
is a part, as well as the relevant portions of the Delaware
General Corporation Law.
Common Stock
General.
As of February 28, 2005, there were
65,471,605 shares of common stock outstanding and 204
stockholders of record, which assumes conversion of our
Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock into our common stock. After this
offering, there will
be                     shares
of our common stock outstanding,
or                     shares
outstanding if the underwriters exercise their over-allotment
option in full.
Voting Rights.
The holders of our common stock are
entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, including the
election of directors, and they do not have cumulative voting
rights. Accordingly, the holders of a majority of the shares of
common stock entitled to vote in any election of directors can
elect all of the directors standing for election, if they so
choose.
Dividends.
Subject to preferences that may be applicable
to any then outstanding preferred stock, holders of our common
stock are entitled to receive ratably those dividends, if any,
as may be declared by the board of directors out of legally
available funds.
Liquidation, Dissolution and Winding Up.
Upon our
liquidation, dissolution or winding up, the holders of our
common stock will be entitled to share ratably in the net assets
legally available for distribution to stockholders after the
payment of all of our debts and other liabilities, subject to
the prior rights of any preferred stock then outstanding.
Preemptive Rights.
Holders of our common stock have no
preemptive or conversion rights or other subscription rights and
there are no redemption or sinking fund provisions applicable to
our common stock.
Assessment.
All outstanding shares of our common stock
are, and the shares of our common stock to be outstanding upon
completion of this offering will be, fully paid and
nonassessable.
Preferred Stock
Upon the closing of this offering, a total
of                     shares
of undesignated preferred stock will be authorized, none of
which will be outstanding. The board of directors will have the
authority, without further action by the stockholders, to issue
from time to time the undesignated preferred stock in one or
more series and to fix the number of shares, designations,
preferences, powers, and relative, participating, optional, or
other special rights and the qualifications or restrictions
thereof. The preferences, powers, rights, and restrictions of
different series of preferred stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund
provisions, purchase funds, and other matters. The issuance of
preferred stock could decrease the amount of earnings and assets
available for distribution to holders of our common stock or
adversely affect the rights and powers, including voting rights,
of the holders of our common stock and may have the effect of
delaying, deferring or preventing a change in control of our
company.
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Warrants
Upon completion of this offering, we will have outstanding
warrants to purchase 9,561,971 shares of our common stock at a
weighted average exercise price of $0.61 per share. The warrants
provide for adjustment in the event of specified mergers,
reorganizations, reclassifications, stock dividends, stock
splits, or other changes in our corporate structure.
Options
As of February 28, 2005, options to purchase 10,223,480
shares of common stock at a weighted average exercise price of
$0.69 per share were outstanding.
Anti-Takeover Effects of Provisions of our Certificate of
Incorporation and Bylaws and Delaware Law
Some provisions of Delaware law and our certificate of
incorporation and bylaws contain provisions that could make the
following transactions more difficult: (1) acquisition of
us by means of a tender offer; (2) acquisition of us by
means of a proxy contest or otherwise; or (3) removal of
our incumbent officers and directors. These provisions,
summarized below, are intended to encourage persons seeking to
acquire control of us to first negotiate with our board of
directors. These provisions also serve to discourage hostile
takeover practices and inadequate takeover bids.
Undesignated Preferred Stock.
Our board of directors has
the ability to authorize undesignated preferred stock, which
allows the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the
success of any unsolicited attempt to change control of our
company. This ability may have the effect of deferring hostile
takeovers or delaying changes in control or management of our
company.
Stockholder Meetings.
Our bylaws provide that a special
meeting of stockholders may be called only by our President, our
Chief Executive Officer or by a resolution adopted by a majority
of our board of directors.
Requirements for Advance Notification of Stockholder
Nominations and Proposals.
Our bylaws establish advance
notice procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of our board of
directors or a committee thereof.
Elimination of Stockholder Action by Written Consent.
Our
certificate of incorporation eliminates the right of
stockholders to act by written consent without a meeting.
Election and Removal of Directors.
Our board of directors
is divided into three classes. The directors in each class will
serve for a three-year term, with one class being elected each
year by our stockholders. Once elected, directors may be removed
only for cause and only by the affirmative vote of at least
66.67% of our outstanding common stock. For more information on
the classified board, see the section entitled "Management
and Board of Directors – Election of Directors."
This system of electing and removing directors may discourage a
third party from making a tender offer or otherwise attempting
to obtain control of us because it generally makes it more
difficult for stockholders to replace a majority of the
directors.
Delaware Anti-Takeover Statute.
We are subject to
Section 203 of the Delaware General Corporation Law, which
prohibits persons deemed "interested stockholders"
from engaging in a "business combination" with a
Delaware corporation for three years following the date these
persons become interested stockholders. Generally, an
"interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years
prior to the determination of interested stockholder status did
own, 15% or more of a corporation's voting stock.
Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. The existence
of this provision may have an anti-takeover effect with respect
to transactions not approved in advance by the board of
directors.
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Special Vote Required for Certain Business Combinations.
Our certificate of incorporation provides that business
combinations by "interested stockholders" generally
require the approval by either the holders of at least 66.67% of
our then outstanding common stock or the majority of our
"continuing directors." An "interested
stockholder" in this provision is defined as a person who,
together with affiliates and associates, owns, or within two
years prior to the determination of interested stockholder
status did own, 15% or more of our common stock. A
"continuing director" is a director who is not
affiliated with the interested stockholder seeking to complete
the business combination and who was a director before such
stockholder became an interested stockholder. Like the Delaware
anti-takeover statute, this provision in our certificate of
incorporation may have the effect of limiting certain
transactions that would otherwise be in the best interests of
our stockholders.
Amendment of Certain Provisions in Our Organizational
Documents.
The amendment of any of the above provisions,
except for the undesignated preferred stock provision, would
require approval by holders of at least 66.67% of our then
outstanding common stock.
The provisions of Delaware law and our certificate of
incorporation and bylaws could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence,
they may also inhibit temporary fluctuations in the market price
of our common stock that often result from actual or rumored
hostile takeover attempts. Such provisions may also have the
effect of preventing changes in our management. It is possible
that these provisions could make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their
best interests.
Limitations of Liability and Indemnification Matters
We have adopted provisions in our certificate of incorporation
that limit the liability of our directors for monetary damages
for breach of their fiduciary duties, except for liability that
cannot be eliminated under the Delaware General Corporation Law.
Delaware law provides that directors of a corporation will not
be personally liable for monetary damages for breach of their
fiduciary duties as directors, except liability for any of the
following: any breach of their duty of loyalty to the
corporation or the stockholders; acts or omissions not in good
faith or that involve intentional misconduct or a knowing
violation of law; unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174
of the Delaware General Corporation Law; or any transaction from
which the director derived an improper personal benefit. This
limitation of liability does not apply to liabilities arising
under the federal securities laws and does not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Our bylaws also provide that we will indemnify our directors and
executive officers and we may indemnify our other officers and
employees and other agents to the fullest extent permitted by
law. We believe that indemnification under our bylaws covers at
least negligence and gross negligence on the part of indemnified
parties. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee, or other agent for any
liability arising out of his or her actions in such capacity,
regardless of whether our bylaws would permit indemnification.
We have entered into separate indemnification agreements with
our directors and executive officers, in addition to the
indemnification provided for in our charter documents. These
agreements, among other things, provide for indemnification of
our directors and executive officers for expenses, judgments,
fines, and settlement amounts incurred by any such person in any
action or proceeding arising out of such person's services
as a director or executive officer or at our request.
Registration Rights of Stockholders
We have entered into two registration rights agreements in
connection with our private placements. Our stockholders who
purchased Series A and Series B Preferred Stock are
entitled to certain registration rights with respect to the
shares of common stock issuable upon conversion of shares of
Series A and Series B Preferred Stock pursuant to an
agreement dated July 9, 2001. We entered into a second
registration rights agreement with EGI-Fund (02-04) Investors,
L.L.C., Perseus-Soros
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Biopharmaceutical Fund, LP, Tullis-Dickerson Capital Focus III,
L.P., TD Origen Capital Fund, L.P., and TD Lighthouse Capital
Fund, L.P. in connection with their purchase of promissory notes
convertible into Series C Preferred Stock on May 19,
2003. Following completion of this offering, and subject to
limitations specified in the agreements, the registration rights
under these agreements include:
•
Our stockholders who purchased shares of Series A and
    Series B Preferred Stock have the ability to require us to
    register the common stock issuable upon conversion of such
    securities and the other shares of common stock held by EGI,
    PSBF, Marquette, Tullis-Dickerson and Merrill Lynch. After
    giving effect to this offering, approximately 57% of our
    outstanding shares will be subject to registration rights
    pursuant to this agreement upon completion of this offering. EGI
    and PSBF each are entitled to request up to two long-form
    registration statements, and Marquette, Tullis-Dickerson,
    Merrill Lynch, and Talon each are entitled to request one
    long-form registration statement. In addition, the holders of
    not less than 1,081,031 shares of Series A Preferred Stock
    issued pursuant to a purchase agreement for Series A
    Preferred Stock on November 30, 2000, other than Talon, are
    entitled to one long-form registration. Holders of at least 25%
    of the shares of common stock issued upon conversion of
    Series A Preferred Stock and Series B Preferred Stock,
    with certain exceptions, are also entitled to request a
    short-form registration statement for an offering to be made on
    a continuous basis pursuant to Rule 415 of the Securities
    Act. Such stockholders' right to demand registration is
    subject to the right of the board of directors to postpone it
    for up to 60 days in certain circumstances. Upon
    conversion, holders of approximately 37,395,959 shares of our
    common stock will have the right to require registration of
    these shares.
•
In addition, under our second registration rights agreement,
    Tullis-Dickerson Capital Focus III, L.P., TD Origen Capital
    Fund, L.P., TD Lighthouse Capital Fund, L.P., EGI-Fund (02-04)
    Investors, LLC, and Perseus-Soros Biopharmaceutical Fund, LP may
    require that we register all or part of the common stock
    issuable upon conversion of shares of any of the Series C
    Preferred Stock and other shares of common stock held by these
    stockholders for sale under the Securities Act. EGI and PSBF
    each are entitled to request up to two long-form registration
    statements and Tullis-Dickerson is entitled to request one
    long-form registration statement. In addition, as soon as
    practicable following the 180th day after completion of this
    offering, we must file a short-form registration statement for
    an offering to be made on a continuous basis pursuant to
    Rule 415 of the Securities Act of all of the common stock
    issued upon conversion of shares of any of the Series C
    Preferred Stock and other shares of common stock held by these
    stockholders. Such stockholders' right to demand
    registration is subject to the right of the board of directors
    to postpone it for up to 60 days in certain circumstances
    and to limit the number of number of shares to be registered.
    Holders of approximately 27,968,061 shares of our common stock
    will have the right to require registration of these shares.
•
If we propose to register any of our securities, other than
    pursuant to a demand registration or a registration on
    Form S-4 or S-8, we must include in such registration
    certain additional shares. The right of certain stockholders to
    include shares in a piggyback registration is subject to the
    right of the underwriters to limit the number of shares included
    in the offering.
We will pay all fees, costs and expenses of such registrations,
subject to certain exceptions.
On May 26, 1999, January 18, 2000 and October 31,
2000, we issued a total of nine warrants that included
registration rights to purchase an aggregate of
759,740 shares of common stock. If we propose to register
any of our securities, other than pursuant to this offering or a
registration on Form S-4 or S-8, we must give notice to
these warrant holders and include in such registration all the
securities with respect to which we have received written
requests for inclusion. The right of these warrant holders to
include shares
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in such a registration is subject to the right of the
underwriters to limit the number of shares included in the
offering. We will pay all fees, costs and expenses of such
registrations, subject to certain exceptions.
Following the completion of this offering, Mr. Valentino is
also entitled to certain registration rights pursuant to his
employment agreement with us dated August 11, 2003.
Mr. Valentino has the ability to request that we register
the common stock issuable upon the exercise of stock options
granted to him pursuant to his employment agreement. As of
December 31, 2004, Mr. Valentino had been granted
options to purchase 3,893,818 shares of common stock
pursuant to this employment agreement.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
Wachovia Bank, N.A.
Nasdaq National Market
We intend to apply to have our common stock quoted on the Nasdaq
National Market under the symbol "ARxT".
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common
stock, and we cannot assure you that a liquid trading market for
our common stock will develop or be sustained after this
offering. Future sales of substantial amounts of common stock,
including shares issued upon exercise of options and warrants,
in the public market after this offering, or the anticipation of
those sales, could adversely affect market prices prevailing
from time to time and could impair our ability to raise capital
through sales of our equity securities.
Sales of Restricted Shares
Upon the closing of this offering, we will have outstanding an
aggregate of
approximately                      shares
of common stock. Of these
shares,                      shares
of common stock to be sold in this offering,
or                      shares
if the underwriters exercise their over-allotment option in
full, will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are
held by any of our affiliates, as that term is defined in
Rule 144 of the Securities Act. All remaining shares were
issued and sold by us in private transactions and are eligible
for public sale only if registered under the Securities Act or
sold in accordance with Rule 144, including
Rule 144(k), or Rule 701, each of which is discussed
below. In addition, upon completion of this offering, we will
have outstanding stock options held by employees and directors
for the purchase
of                      shares
of common stock.
All of our officers and directors and substantially all of our
stockholders are subject to lock-up agreements under which they
have agreed not to transfer or dispose of, directly or
indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of
common stock, for a period of 180 days after the date of
this prospectus, which is subject to extension in some
circumstances, as discussed below.
As a result of the lock-up agreements described below and the
provisions of Rule 144, Rule 144(k) and Rule 701
under the Securities Act, the shares of our common stock
(excluding the shares to be sold in this offering) will be
available for sale in the public market as follows:
•
shares
    will be eligible for sale on the date of this prospectus;
•
shares
    will be eligible for sale under Rule 144 or Rule 701 ninety
    days after the date of this prospectus; and
•
shares
    will be eligible for sale upon the expiration of the lock-up
    agreements, as more particularly and except as described below,
    beginning after expiration of the lock-up period pursuant to
    Rule 144, Rule 144(k) or Rule 701.
We expect the
remaining                      shares
to become eligible for future sale in the public market pursuant
to Rule 144 at varying times after one year from the date
of this prospectus.
Rule 144
In general, under Rule 144, beginning 90 days after
the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
•
1% of the number of shares of common stock then outstanding,
    which will equal
    approximately                      shares
    immediately after this offering; or
•
the average weekly trading volume of the common stock on the
    Nasdaq National Market during the four calendar weeks preceding
    the filing of a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us. Upon completion of the
180-day lock-up period,
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subject to any extension of the lock-up period under
circumstances described below, substantially all of our
outstanding restricted securities will be eligible for sale
under Rule 144.
Rule 144(k)
Subject to the lock-up agreements described below, shares of our
common stock eligible for sale under Rule 144(k) may be
sold immediately upon the completion of this offering. In
general, under Rule 144(k), a person may sell shares of
common stock acquired from us immediately upon completion of
this offering, without regard to manner of sale, the
availability of public information or volume, if:
•
the person is not our affiliate and has not been our affiliate
    at any time during the three months preceding such a sale; and
•
the person has beneficially owned the shares proposed to be sold
    for at least two years, including the holding period of any
    prior owner other than an affiliate.
Upon expiration of the lock-up period, unless held by our
affiliates,
approximately                     shares
of common stock will be eligible for sale under Rule 144(k).
Rule 701
In general, under Rule 701 of the Securities Act, any of
our employees, consultants or advisors who purchased shares from
us in connection with a qualified compensatory stock plan or
other written agreement are eligible to resell those shares
90 days after the effective date of this offering in
reliance on Rule 144 but without compliance with various
restrictions, including the holding period, contained in
Rule 144. Subject to the lock-up period,
approximately                     shares
of common stock will be eligible for sale in accordance with
Rule 701.
Lock-up Agreements
The holders of substantially all of our currently outstanding
stock have agreed that, subject to the exceptions described in
the "Underwriters" section, without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Morgan Stanley & Co. Incorporated on behalf
of the underwriters, they will not, during the period ending
180 days after the date of this prospectus:
•
offer, pledge, sell, contract to sell, sell any option or
    contract to purchase, purchase any option or contract to sell,
    grant any option, right or warrant for the sale of or otherwise
    dispose of or transfer directly or indirectly, any shares of
    common stock or any securities convertible into or exercisable
    or exchangeable for common stock; or
•
enter into any swap or other arrangement that transfers to
    another, in whole or in part, any of the economic consequences
    of ownership of the common stock or any securities convertible
    into or exchangeable for common stock,
whether any transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise.
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Registration Rights
Upon completion of this offering, the holders of an aggregate of
approximately                     shares
of our common stock plus shares issuable upon exercise of our
outstanding warrants will have the right to require us to
register these shares under the Securities Act under certain
circumstances. After registration pursuant to these rights,
these shares will become freely tradable without restriction
under the Securities Act. For more information regarding these
registration rights, see "Description of Capital
Stock – Registration Rights."
Stock Options
We intend to file a registration statement under the Securities
Act covering up to 11,500,000 shares of common stock reserved
for issuance under our 1999 Long-Term Incentive Plan. This
registration statement is expected to be filed soon after the
date of this prospectus and will automatically become effective
upon filing. Accordingly, shares registered under such
registration statement will be available for sale in the open
market, unless such shares are subject to vesting restrictions
with us or are otherwise subject to the lock-up agreements
described above.
Warrants
Upon completion of this offering, there will be warrants
outstanding to purchase 9,561,971 shares of common stock with a
weighted average exercise price of $0.61 per share.
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FEDERAL INCOME TAX CONSEQUENCES TO
NON-U.S. HOLDERS OF COMMON STOCK
General
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of our common stock that may be
relevant to you if you are a non-U.S. holder that acquires
our common stock pursuant to this offering. This discussion is
limited to non-U.S. holders who hold our common stock as a
capital asset within the meaning of Section 1221 of the
Code.
This discussion does not address all aspects of
U.S. federal income and estate taxation that may be
relevant to you in light of your particular circumstances, and
does not address any foreign, state or local tax consequences.
Furthermore, this discussion does not consider specific facts
and circumstances that may be relevant to a particular
non-U.S. holder's tax position, specific rules that
may apply to certain non-U.S. holders, including banks,
insurance companies, or other financial institutions,
partnerships or other pass-through entities,
U.S. expatriates, dealers and traders in securities, or
special tax rules that may apply to a non-U.S. holder that
holds our common stock as part of a straddle, hedge or
conversion transaction. This discussion is based on provisions
of the Code, Treasury Regulations and administrative and
judicial interpretations as of the date of this prospectus. All
of these are subject to change, possibly with retroactive
effect, or different interpretations. If you are considering
buying our common stock, you should consult your own tax advisor
about current and possible future tax consequences of holding
and disposing of our common stock in your particular situation.
For purposes of this discussion, a non-U.S. holder is a
beneficial owner of common stock if that individual is any of
the following for U.S. federal income tax purposes:
•
a nonresident alien individual within the meaning of
    Section 7701(b) of the Code;
•
a foreign corporation within the meaning of Section 7701(a)
    of the Code or other foreign entity taxable as a foreign
    corporation under U.S. federal income tax law; or
•
a foreign estate or trust within the meaning of
    Section 7701(a) of the Code.
If an entity treated as a partnership for U.S. federal
income tax purposes holds shares of common stock, the tax
treatment of a partner generally will depend on the status of
the partner and upon the activities of the partnership. If you
are a partner of a partnership holding shares of our common
stock, we suggest you consult your own tax advisor.
Distributions
If distributions are paid on the shares of our common stock,
these distributions generally will constitute dividends for
U.S. federal income tax purposes to the extent paid from
our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles, and then will
constitute a return of capital that is applied against your tax
basis in the common stock to the extent these distributions
exceed those earnings and profits. Distributions in excess of
our current and accumulated earnings and profits and your tax
basis in the common stock (determined on a share by share basis)
will be treated as a gain from the sale or exchange of the
common stock, the treatment of which is discussed below.
Dividends paid to a non-U.S. holder that are not
effectively connected with the conduct of a U.S. trade or
business of the non-U.S. holder will be subject to
U.S. federal withholding tax at a 30% rate or, if an income
tax treaty applies and certain information reporting
requirements are satisfied, a lower rate specified by the
treaty. Non-U.S. holders should consult their tax advisors
regarding their entitlement to benefits under a relevant tax
treaty.
The U.S. federal withholding tax generally is imposed on
the gross amount of a distribution, regardless of whether we
have sufficient earnings and profits to cause the distribution
to be a dividend for U.S. federal income tax purposes.
However, we may elect to withhold on less than the gross amount
of the
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distribution if we determine that the distribution is not paid
out of our current or accumulated earnings and profits, based on
our reasonable estimates.
A non-U.S. holder eligible for a reduced rate of
U.S. federal withholding tax under a tax treaty may
establish entitlement to the benefit of a reduced rate of
withholding under such tax treaty by timely filing a properly
completed Form W-8BEN with us prior to the payment of a
dividend. A non-U.S. holder eligible for a reduced rate of
U.S. federal withholding tax under a tax treaty may obtain
a refund of any excess amounts withheld by filing an appropriate
claim for a refund together with the required information with
the Internal Revenue Service.
Dividends that are effectively connected with a
non-U.S. holder's conduct of a trade or business
within the United States and, if an applicable tax treaty so
provides, are also attributable to a non-U.S. holder's
U.S. permanent establishment, are exempt from
U.S. federal withholding tax if the non-U.S. holder
furnishes to us or our paying agent a properly completed IRS
Form W-8ECI (or successor form) containing the
non-U.S. holder's taxpayer identification number.
However, dividends exempt from U.S. federal withholding tax
because they are "effectively connected" or
attributable to a U.S. permanent establishment under an
applicable tax treaty are subject to U.S. federal income
tax on a net income basis at the regular graduated
U.S. federal income tax rates. Any such effectively
connected dividends received by a foreign corporation may, under
certain circumstances, be subject to an additional "branch
profits tax" at a 30% rate or a lower rate specified by an
applicable tax treaty.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to
U.S. federal income tax or withholding tax with respect to
gain recognized on a sale or other disposition of common stock
unless one of the following applies:
•
The gain is effectively connected with a
    non-U.S. holder's conduct of a trade or business
    within the United States and, if an applicable tax treaty so
    provides, the gain is also attributable to a
    non-U.S. holder's U.S. permanent establishment.
    In such a case, unless an applicable tax treaty provides
    otherwise, the non-U.S. holder generally will be taxed on
    its net gain derived from the sale at regular graduated
    U.S. federal income tax rates, and in the case of a foreign
    corporation, may also be subject to an additional branch profits
    tax as described above.
•
A non-U.S. holder who is an individual holds our common
    stock as a capital asset and is present in the United States for
    183 or more days in the taxable year of the sale or other
    disposition, and certain other conditions are met. In such a
    case, the non-U.S. holder will be subject to a flat 30% tax
    on the gain derived from the sale, which may be offset by
    certain U.S. capital losses realized in the taxable year of
    the sale or other disposition.
•
At any time during the shorter of the 5 year period ending
    on the date of a sale or other disposition of our stock or the
    period that the non-U.S. holder held our common stock, our
    company is classified as a United States Real Property Holding
    Corporation, generally defined as a corporation, the fair market
    value of whose real property interests equals or exceeds 50% of
    the fair market value of its U.S. real property interests,
    its interests in real property located outside the United States
    and any other of its assets used or held for use in a trade or
    business. Our company believes it is not and does not anticipate
    becoming a United States Real Property Holding Corporation for
    United States federal income tax purposes.
Information Reporting and Backup Withholding Tax
We must report annually to the Internal Revenue Service and to
each non-U.S. holder the amount of dividends paid to that
holder and the tax withheld with respect to those dividends.
These information reporting requirements apply even if
withholding was not required. Pursuant to an applicable
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tax treaty or other agreement, copies of the information returns
reporting those dividends and withholding may also be made
available to the tax authorities in the country in which the
non-U.S. holder resides.
Under certain circumstances, Treasury regulations require
information reporting and backup withholding (currently at a
rate of 28%), on certain payments on common stock. A
non-U.S. holder of common stock that fails to certify its
non-U.S. holder status in accordance with applicable
Treasury regulations or otherwise establish an exemption may be
subject to information reporting and this backup withholding tax
on payments of dividends.
Payment of the proceeds of a sale of our common stock by or
through a U.S. office of a broker is subject to both
information reporting and backup withholding unless the
non-U.S. holder certifies to the payor in the manner
required as to its non-U.S. status under penalties of
perjury or otherwise establishes an exemption. As a general
matter, information reporting and backup withholding will not
apply to a payment of the proceeds of a sale of our common stock
by or through a foreign office of a foreign broker effected
outside the United States. However, information reporting
requirements, but not backup withholding, will apply to payment
of the proceeds of a sale of our common stock by or through a
foreign office of a broker effected outside the United States if
that broker is:
•
a U.S. person,
•
a foreign person that derives 50% or more of its gross income
    for specified periods from the conduct of a trade or business in
    the United States,
•
a "controlled foreign corporation" as defined in the
    Code, or
•
a foreign partnership that at any time during its tax year
    either (i) has one or more U.S. persons that, in the
    aggregate, own more than 50% of the income or capital interests
    in the partnership or (ii) is engaged in the conduct of a
    trade or business in the United States.
Information reporting requirements will not apply to the payment
of the proceeds of a sale of our common stock if the broker
receives a statement from the owner, signed under penalty of
perjury, certifying such owner's non-U.S. status or an
exemption is otherwise established. Non-U.S. holders should
consult their own tax advisors regarding the application of the
information reporting and backup withholding rules to them.
Amounts withheld under the backup withholding rules do not
constitute a separate U.S. federal income tax. Rather, any
amounts withheld under the backup withholding rules will be
refunded or allowed as a credit against the holder's
U.S. federal income tax liability, if any, provided the
required information and appropriate claim for refund is filed
with the Internal Revenue Service.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is
not a citizen or resident, as defined for U.S. federal
estate tax purposes, of the United States at the time of death
will be included in that individual's gross estate for
U.S. federal estate tax purposes and may be subject to
U.S. federal estate tax, unless an applicable estate tax
treaty provides otherwise.
The foregoing discussion is a summary of the material federal
tax consequences of the ownership, sale or other disposition of
our common stock by non-U.S. holders for U.S. federal
income and estate tax purposes. You are urged to consult your
own tax advisor with respect to the particular tax consequences
to you of ownership and disposition of our common stock,
including the effect of any state, local, non-U.S. or other
tax laws.
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UNDERWRITING
Under the terms and subject to the conditions contained in a
purchase agreement dated the date of this prospectus, the
underwriters named below, for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Morgan Stanley &
Co. Incorporated, Deutsche Bank Securities and RBC Capital
Markets Corporation are acting as representatives, have
severally agreed to purchase, and we and the selling
stockholders have agreed to sell to them, severally, the number
of shares indicated below:
Number of
Underwriter
Shares
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Morgan Stanley & Co. Incorporated
Deutsche Bank Securities
RBC Capital Markets Corporation
Total
The underwriters are offering the shares of common stock subject
to their acceptance of the shares and subject to prior sale. The
purchase agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of
common stock offered by this prospectus are subject to the
approval of specified legal matters by their counsel and to
other conditions. The underwriters are obligated to take and pay
for all of the shares of common stock offered by this prospectus
if any such shares are taken. If an underwriter defaults, the
purchase agreement provides that the purchase commitments of the
non-defaulting underwriters may be increased or the purchase
agreement may be terminated. However, the underwriters are not
required to take or pay for the shares covered by the
underwriters' over-allotment option described below. We and
the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act or to contribute to payments the
underwriters may be required to make in respect of those
liabilities.
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.
A prospectus in electronic format will be made available on the
websites maintained by one or more of the joint book-running
managers of this offering and may also be made available on
websites maintained by other underwriters. The underwriters may
agree to allocate a number of shares to underwriters for sale to
their online brokerage account holders. Internet distributions
will be allocated by joint book-running managers to underwriters
that may make internet distributions on the same basis as other
allocations.
Commissions and Discounts
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the public offering
price listed on the cover page of this prospectus and part to
certain dealers at a price that represents a concession not in
excess of
$          a
share under the public offering price. Any underwriter may
allow, and such dealers may reallow, a concession not in excess
of
$          a
share to other underwriters or to certain dealers. After the
initial offering of the shares of common stock, the offering
price and other selling terms may from time to time be varied by
the representatives.
The following table shows the underwriting discount and
commissions that we and the selling stockholders are to pay to
the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of our
common stock.
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Paid by Us
Paid by Selling Stockholders
No Exercise
Full Exercise
No Exercise
Full Exercise
Per share
$
$
$
$
Total
$
$
$
$
In addition, we estimate that the expenses of this offering
payable by us and the selling stockholders will be approximately
$                    .
Over-allotment Option
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to
an aggregate
of           additional
shares of common stock at the public offering price listed on
the cover page of this prospectus, less the underwriting
discount and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the
option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase a number of
additional shares proportionate to that of common stock as the
underwriter's initial amount reflected in the above table.
If the underwriters' option is exercised in full, the total
price to the public would be
$          and
the total proceeds to us would be $ after deducting the
underwriting discount and commissions and estimated offering
expenses.
No Sales of Similar Securities
We, each of our directors and officers the selling stockholders
and the other holders of substantially all of our outstanding
stock have agreed that, without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated on behalf of the
underwriters, we and they will not, during the period ending
180 days after the date of this prospectus:
•
offer, pledge, sell, contract to sell, sell any option or
    contract to purchase, purchase any option or contract to sell,
    grant any option, right or warrant for the sale of or otherwise
    dispose of or transfer directly or indirectly, any shares of
    common stock or any securities convertible into or exercisable
    or exchangeable for common stock; or
•
enter into any swap or other arrangement that transfers to
    another, in whole or in part, any of the economic consequences
    of ownership of the common stock or any securities convertible
    into or exercisable or exchangeable for common stock,
whether any transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. These restrictions do not apply to:
•
the sale of shares to the underwriters;
•
the issuance by us of shares of common stock upon the exercise
    of an option or a warrant or the conversion of a security
    outstanding on the date of this prospectus that is described in
    this prospectus;
•
the issuance by us of options to purchase shares of common stock
    pursuant to our existing stock incentive plans for employees and
    nonemployee directors described in this prospectus, provided
    that the options do not become vested and exercisable during the
    period referred to in this paragraph (subject to extension
    as provided below);
•
transactions by any person other than us relating to shares of
    common stock or other securities acquired in open market
    transactions after the completion of the offering of the shares
    or reserved shares purchased in the offering, provided that the
    transfer is not required to be reported in any public report or
    filing with the SEC or otherwise and the transferor does not
    voluntarily make such report within one week of the
    transfer; or
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•
transfers not involving dispositions for value by any person
    other than us by gift, to a trust for the benefit of immediate
    family members, as a distribution to limited partners or
    stockholders of the transferor or to any investment fund or
    other entity controlled or managed by the transferor provided
    that the transferee agrees to be bound by such restrictions and
    the transfer is not required to be reported in any public report
    or filing with the SEC or otherwise and the transferor does not
    voluntarily make such report.
Price Stabilization and Short Positions
In order to facilitate the offering of the common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the purchase agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over-allotment option. The underwriters may also sell
shares in excess of the over-allotment option, creating a naked
short position. 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 after pricing that could
adversely affect investors who purchase in this offering. In
addition, to stabilize the price of the common stock, the
underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in this offering, if
the syndicate repurchases previously distributed common stock in
transactions to cover syndicate short positions or to stabilize
the price of the common stock. Any of these activities may
stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities
at any time without notice.
Reserved Shares
At our request, the underwriters have reserved for sale, at the
initial public offering price, up
to            shares
offered in this prospectus for directors, officers, employees,
business associates and other persons with whom we have a
relationship. The number of shares of common stock available for
sale to the general public will be reduced to the extent these
persons purchase reserved shares. Any reserved shares which are
not purchased will be offered by the underwriters to the general
public on the same terms as the other shares offered by this
prospectus.
Quotation on the Nasdaq National Market
We expect the shares to be approved for quotation on the Nasdaq
National Market, subject to notice of issuance, under the symbol
"ARxT".
Pricing of the Offering
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiations between us and the representatives.
Among the factors to be considered in determining the initial
public offering price will be our future prospects and those of
our industry in general, our revenues, earnings and other
financial operating information in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies
engaged in activities similar to ours.
An active trading market for the shares may not develop. It is
possible that after the offering, the shares will not trade in
the public market at or above the initial public offering price.
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Other Relationships
Certain of the underwriters or their affiliates have provided
from time to time, and may provide in the future, investment and
commercial banking and financial advisory services to us in the
ordinary course of business, for which they have received and
may continue to receive customary fees and commissions.
Affiliates of Merrill Lynch, Pierce, Fenner & Smith
Incorporated beneficially own 1,698,840 shares of common
stock (assuming conversion of our Series B Preferred Stock
and Series C Preferred Stock) and 553,534 warrants to
purchase common stock, or 3.41%, of our common stock, which they
acquired in private transactions in July 2001, May 2003 and June
2003.
LEGAL MATTERS
Alston & Bird LLP will pass upon the legality of the
shares of common stock to be issued in this offering.
Ropes & Gray LLP will pass upon certain legal matters
in connection with this offering on behalf of the underwriters.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our financial statements and
schedule at June 30, 2004 and 2003 and for each of the
three years in the period ended June 30, 2004 as set forth
in their report. We have included our financial statements and
schedule in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report
given on their authority as experts on accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (SEC),
Washington, D.C. 20549, a registration statement on
Form S-1 under the Securities Act of 1933, with respect to
our common stock offered hereby. This prospectus, which forms
part of the registration statement, does not contain all of the
information set forth in the registration statement and the
exhibits and schedules to the registration statement. Some items
are omitted in accordance with the rules and regulations of the
SEC. For further information about us and our common stock, we
refer you to the registration statement and the exhibits and
schedules to the registration statement filed as part of the
registration statement. Statements contained in this prospectus
as to the contents of any contract or other document filed as an
exhibit are qualified in all respects by reference to the actual
text of the exhibit. You may read and copy the registration
statement, including the exhibits and schedules to the
registration statement, at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. You
can obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site at
www.sec.gov,
from which you
can electronically access the registration statement, including
the exhibits and schedules to the registration statement.
As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of
1934, as amended. We will fulfill our obligations with respect
to such requirements by filing periodic reports and other
information with the SEC. We intend to furnish our stockholders
with annual reports containing financial statements certified by
an independent registered public accounting firm. We also
maintain an Internet site at
www.adamsrt.com.
Our
internet site is not a part of this prospectus.
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Adams Laboratories, Inc.
Index to Financial Statements and Schedule
Report of Independent Registered Public Accounting Firm
F-2
Balance Sheets as of December 31, 2004 (unaudited),
    June 30, 2004 and 2003
F-3
Statements of Operations for the six months ended
    December 31, 2004 and 2003 (unaudited) and the years ended
    June 30, 2004, 2003 and 2002
F-5
Statements of Redeemable Convertible Preferred Stock and
    Stockholders' Equity (Deficit) for the six months ended
    December 31, 2004 (unaudited) and the years ended
    June 30, 2004, 2003 and 2002
F-6
Statements of Cash Flows for the six months ended
    December 31, 2004 and 2003 (unaudited) and the years ended
    June 30, 2004, 2003 and 2002
F-7
Notes to Financial Statements
F-8
Schedule of Valuation and Qualifying Accounts
F-28
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Adams Laboratories, Inc.
We have audited the accompanying balance sheets of Adams
Laboratories, Inc. as of June 30, 2004 and 2003, and the
related statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit) and
cash flows for each of the three years in the period ended
June 30, 2004. Our audits also included the financial
statement schedule listed in the index on Page F-1 for each
of the three years in the period ended June 30, 2004. These
financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 controls over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as 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 Adams Laboratories, Inc. at June 30, 2004 and 2003,
and the results of its operations and its cash flows for the
three years in the period ended June 30, 2004 in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule for
each of the three years in the period ended June 30, 2004,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
New York, New York
March 23, 2005
F-2
Table of Contents
Adams Laboratories, Inc.
Balance Sheets
($ in thousands, except per share amounts)
June 30,
December 31,
2004
2004
2003
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
26,772
$
43,391
$
9,405
Short-term investments
9,948
—
—
Accounts receivable, net of allowance for doubtful accounts of
    $201 at December 31, 2004 (unaudited) and $203 and $35
    at June 30, 2004 and 2003, respectively
19,720
4,675
2,633
Inventories, net
1,852
2,516
1,860
Prepaid expenses and other assets
9,670
682
363
Deferred tax assets
7,173
10,337
—
Total current assets
75,135
61,601
14,261
Property, plant and equipment, net of accumulated depreciation
1,934
516
4,112
Deferred tax assets
4,678
6,456
—
AlleRx® license, net of accumulated amortization of $342 at
    December 31, 2004 (unaudited) and $292 and $192 at
    June 30, 2004 and 2003, respectively
2,158
208
308
Other assets, net of accumulated amortization of $341 at
    December 31, 2004 (unaudited) and $158 and $227 at
    June 30, 2004 and 2003, respectively
2,072
2,254
1,701
Total assets
$
85,977
$
71,035
$
20,382
See Notes to Financial Statements which are an integral part of
these statements.
F-3
Table of Contents
Adams Laboratories, Inc.
Balance Sheets — (Continued)
(In thousands, except per share amounts)
June 30,
December 31,
2004
2004
2003
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable
$
5,519
$
2,953
$
634
Accrued compensation and related items
1,824
1,745
651
Accrued returns, chargebacks and rebates
8,763
6,954
3,649
Accrued litigation settlement
—
—
2,000
Income taxes payable
125
269
—
Payable for AlleRx® license
2,000
—
—
Other current liabilities
1,798
2,529
2,097
Total current liabilities
20,029
14,450
9,031
Long-term liabilities:
Convertible notes payable
—
—
13,785
Deferred gain on sale of plant assets
1,563
1,647
—
Accrued royalties
953
1,084
1,088
Total liabilities
22,545
17,181
23,904
Redeemable convertible preferred stock:
Series A, $0.01 par value:
Authorized shares — 15,000
Issued and outstanding shares — 12,271 at
    December 31, 2004 (unaudited) and at June 30, 2004 and
    2003
72,444
26,261
32,639
Series B, $0.01 par value:
Authorized shares — 20,000
Issued and outstanding shares — 16,129 at
    December 31, 2004 (unaudited) and at June 30, 2004 and
    2003
64,517
25,807
28,008
Series C, $0.01 par value:
Authorized shares — 15,000
Issued and outstanding shares — 13,815 at
    December 31, 2004 (unaudited) and at June 30, 2004
99,468
58,783
—
Total redeemable convertible preferred stock
236,429
110,851
60,647
Stockholders' deficit:
Common stock, Class A, $0.01 par value:
Authorized shares — 100,000
Issued and outstanding shares — 17,362 at
    December 31, 2004 (unaudited) and 14,843 and 8,832 at
    June 30, 2004 and 2003, respectively
174
148
88
Additional paid-in capital
(152,518
)
(27,264
)
1,450
Accumulated deficit
(20,653
)
(29,881
)
(65,707
)
Total stockholders' deficit
(172,997
)
(56,997
)
(64,169
)
Total liabilities, redeemable convertible preferred stock and
    stockholders' deficit
$
85,977
$
71,035
$
20,382
See Notes to Financial Statements which are an integral part of
these statements.
F-4
Table of Contents
Adams Laboratories, Inc.
Statements of Operations
(In thousands, except per share amounts)
Six Months Ended
December 31,
Year Ended June 30,
2004
2003
2004
2003
2002
(unaudited)
Net sales
$
62,021
$
27,074
$
61,295
$
14,038
$
13,755
Cost of goods sold
13,350
5,049
11,928
5,252
4,024
Gross margin
48,671
22,025
49,367
8,786
9,731
Selling, marketing & administrative
30,768
9,834
23,286
23,310
17,968
Product development
3,059
1,719
3,181
4,542
7,419
Interest expense
52
1,582
3,403
3,601
—
Interest income
(294
)
(52
)
(205
)
(29
)
(180
)
33,585
13,083
29,665
31,424
25,207
Income/(loss) before income taxes
15,086
8,942
19,702
(22,638
)
(15,476
)
Provision/(benefit) for income taxes
5,858
—
(16,124
)
—
—
Net income/(loss)
9,228
8,942
35,826
(22,638
)
(15,476
)
Accretion of preferred stock
(10,953
)
(320
)
(590
)
(627
)
(619
)
Net (loss)/income applicable to common stockholders
$
(1,725
)
$
8,622
$
35,236
$
(23,265
)
$
(16,095
)
(Loss)/earnings per common share
Basic
$
(0.10
)
$
0.71
$
2.63
$
(2.64
)
$
(1.83
)
Diluted
$
(0.10
)
$
0.38
$
1.43
$
(2.64
)
$
(1.83
)
Weighted-average of common shares used in (loss)/ earnings per
    share calculation
Basic
16,762
12,161
13,387
8,827
8,803
Diluted
16,762
22,552
24,584
8,827
8,803
Pro forma earnings per common share
Basic
$
0.14
$
0.58
Diluted
$
0.12
$
0.49
Shares used in pro forma earnings per common share calculation
Basic
64,817
61,379
Diluted
78,957
72,577
See Notes to Financials Statements which are an integral part of
these statements.
F-5
Table of Contents
Adams Laboratories, Inc.
Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)
(Amounts in thousands)
Preferred Stock
Total
Redeemable
Total
Series A
Series B
Series C
Convertible
Common Stock
Additional
Stockholders'
Preferred
Paid-In
Accumulated
Equity/
Shares
Amount
Shares
Amount
Shares
Amount
Stock
Shares
Amount
Capital
Deficit
(Deficit)
Balance as of July 1, 2001
12,271
$
36,620
—
$
—
—
$
—
$
36,620
8,799
$
88
$
(7,216
)
$
(27,593
)
$
(34,721
)
Issuance of preferred stock, net
—
—
14,219
21,393
—
—
21,393
—
—
—
—
—
Conversion of notes payable
—
—
1,910
3,219
—
—
3,219
—
—
—
—
—
Stock option compensation expense
—
—
—
—
—
—
—
—
—
1,292
—
1,292
Exercise of stock options
—
—
—
—
—
—
—
5
—
7
—
7
Accretion of preferred stock
—
216
—
7,403
—
—
7,619
—
—
(7,619
)
—
(7,619
)
Net loss
—
—
—
—
—
—
—
—
—
—
(15,476
)
(15,476
)
Balance as of June 30, 2002
12,271
$
36,836
16,129
$
32,015
—
$
—
$
68,851
8,804
$
88
$
(13,536
)
$
(43,069
)
$
(56,517
)
Issuance of common stock warrants and recognition of beneficial
    conversion feature related to bridge financing
—
—
—
—
—
—
—
—
—
2,981
—
2,981
Issuance of common stock warrants related to Series C Notes
—
—
—
—
—
—
—
—
—
2,888
—
2,888
Stock option compensation expense
—
—
—
—
—
—
—
—
—
880
—
880
Exercise of stock options
—
—
—
—
—
—
—
23
—
33
—
33
Exercise of warrants
—
—
—
—
—
—
—
5
—
—
—
—
Accretion of preferred stock
—
(4,197
)
—
(4,007
)
—
—
(8,204
)
—
—
8,204
—
8,204
Net loss
—
—
—
—
—
—
—
—
—
—
(22,638
)
(22,638
)
Balance as of June 30, 2003
12,271
$
32,639
16,129
$
28,008
—
$
—
$
60,647
8,832
$
88
$
1,450
$
(65,707
)
$
(64,169
)
Issuance of common stock warrants related to Series C Notes
—
—
—
—
—
—
—
—
—
811
—
811
Issuance of preferred stock, net
—
—
—
—
13,815
22,104
22,104
—
—
—
—
—
Reverse unamortized debt discount upon conversion of
    Series C preferred stock
—
—
—
—
—
—
—
—
—
(2,119
)
—
(2,119
)
Stock option compensation expense
—
—
—
—
—
—
—
—
—
686
—
686
Exercise of stock options
—
—
—
—
—
—
—
62
1
8
—
9
Exercise of warrants
—
—
—
—
—
—
—
5,949
59
—
—
59
Accretion of preferred stock
—
(6,378
)
—
(2,201
)
—
36,679
28,100
—
—
(28,100
)
—
(28,100
)
Net income
—
—
—
—
—
—
—
—
—
—
35,826
35,826
Balance as of June 30, 2004
12,271
$
26,261
16,129
$
25,807
13,815
$
58,783
$
110,851
14,843
$
148
$
(27,264
)
$
(29,881
)
$
(56,997
)
Stock option compensation expense (unaudited)
—
—
—
—
—
—
—
—
—
179
—
179
Exercise of stock options (unaudited)
—
—
—
—
—
—
—
99
1
13
—
14
Exercise of warrants (unaudited)
—
—
—
—
—
—
—
2,420
25
132
—
157
Accretion of preferred stock
—
46,183
—
38,710
—
40,685
125,578
—
—
(125,578
)
—
(125,578
)
Net income (unaudited)
—
—
—
—
—
—
—
—
—
—
9,228
9,228
Balance as of December 31, 2004 (unaudited)
12,271
$
72,444
16,129
$
64,517
13,815
$
99,468
$
236,429
17,362
$
174
$
(152,518
)
$
(20,653
)
$
(172,997
)
See Notes to Financials Statements which are an integral part of
these statements.
F-6
Table of Contents
Adams Laboratories, Inc.
Statements of Cash Flows
($ in thousands)
Six Months Ended
December 31,
Year Ended June 30,
2004
2003
2004
2003
2002
(unaudited)
Operating Activities
Net income/(loss)
$
9,228
$
8,942
$
35,826
$
(22,638
)
$
(15,476
)
Adjustments to reconcile net income/(loss) to net cash (used
    in)/provided by operating activities:
Depreciation and amortization
327
538
1,043
1,235
981
Stock option compensation expense
179
343
686
880
1,292
Non-cash interest capitalized in note principal
—
—
969
—
162
Non-cash interest on convertible notes payable
—
733
1,406
174
—
Write off of trade name
—
—
205
—
—
Non-cash interest on bridge loans
—
—
—
2,981
—
Litigation settlement
—
—
(2,000
)
2,000
—
Gain on sale of property, plant and equipment
—
—
(78
)
—
—
Loss on equipment write-off
—
—
—
43
417
Changes in operating assets and liabilities:
Accounts receivable
(15,046
)
(15,423
)
(2,042
)
(2,090
)
875
Inventories
664
(442
)
(656
)
1,441
(1,618
)
Prepaid expenses and other current assets
(832
)
(265
)
(838
)
310
(544
)
Prepayment of advertising expense
(8,155
)
—
—
—
—
Deferred tax assets
4,942
—
(16,793
)
—
—
Other assets
(2,000
)
(221
)
265
(160
)
—
Accounts payable
2,566
436
2,319
11
(157
)
Income taxes payable
(144
)
—
269
—
—
Accrued expenses
2,942
3,779
5,172
2,199
1,903
Net cash (used in)/provided by operating activities
(5,329
)
(1,580
)
25,753
(13,614
)
(12,165
)
Investing Activities
Purchases of property, plant and equipment
(1,513
)
(54
)
(530
)
(402
)
(1,411
)
Proceeds from sale of property, plant and equipment
—
—
5,580
—
—
Purchase of short-term investments
(9,948
)
—
—
—
—
Purchases of intangibles
—
—
(1,250
)
—
(500
)
Net cash (used in)/provided by investing activities
(11,461
)
(54
)
3,800
(402
)
(1,911
)
Financing Activities
Proceeds from borrowings on equipment loan and line of credit
—
—
—
—
446
Payments on equipment loan and line of credit
—
(89
)
(271
)
(170
)
(2,005
)
Proceeds from issuance of convertible notes payable and bridge
    loan
—
4,636
4,636
16,286
—
Proceeds from issuance of redeemable preferred stock, net
—
—
—
—
21,393
Proceeds from exercise of warrants
157
50
59
—
—
Proceeds from exercise of stock options
14
2
9
33
7
Net cash provided by financing activities
171
4,599
4,433
16,149
19,841
Net (decrease)/increase in cash and cash equivalents
(16,619
)
2,965
33,986
2,133
5,765
Cash and cash equivalents at beginning of period
43,391
9,405
9,405
7,272
1,507
Cash and cash equivalents at end of period
$
26,772
$
12,370
$
43,391
$
9,405
$
7,272
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest
$
—
$
225
$
917
$
93
$
14
Cash paid during the period for income taxes
$
1,060
$
—
$
400
$
—
$
—
See Notes to Financials Statements which are an integral part of
these statements.
F-7
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
1.
Nature of Operations and Summary of Significant Accounting
    Policies
Nature of Operations
Adams Laboratories, Inc. (doing business as Adams Respiratory
Therapeutics) ("the Company"), a Texas corporation, is
a specialty pharmaceutical company focused on the late-stage
development, commercialization and marketing of over-the-counter
("OTC") and prescription pharmaceuticals for the
treatment of respiratory disorders. The Company currently
markets two OTC products under its Mucinex brand. The
Company's corporate offices are in Chester, New Jersey.
Basis of Presentation
The Company operates in one business segment, specialty
pharmaceuticals. The Company's "fiscal year" is
from July 1 through June 30.
Use of Estimates
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States
which require the use of judgments and estimates by management
that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those
estimates.
Unaudited Interim Financial
Information
The accompanying balance sheet as of December 31, 2004, the
statements of operations and cash flows for the six months ended
December 31, 2004 and 2003 and the statement of redeemable
convertible preferred stock and stockholders' equity
(deficit) for the six months ended December 31, 2004,
and the related information contained in the notes to financial
statements are unaudited. These unaudited interim financial
statements and notes have been prepared in accordance with
accounting principles generally accepted in the United States.
In the opinion of the Company's management, the unaudited
interim financial statements have been prepared on the same
basis as the audited financial statements and include all
adjustments, consisting of only normal recurring accruals,
necessary for the fair presentation of the Company's
financial position as of December 31, 2004 and 2003, and
results of operations and cash flows for the six months ended
December 31, 2004 and 2003. The results for the six months
ended December 31, 2004 are not necessarily indicative of
the results to be expected for the year ended June 30, 2005
or for any future interim period or for any future year.
Derivative Financial
Instruments
The Company holds no derivative financial instruments and does
not currently engage in hedging activities.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity date of three months or less at the date of acquisition
to be cash equivalents.
F-8
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
Short-term
Investments
During the six months ended December 31, 2004, the Company
has investments in debt securities that it considers
"held-to-maturity" under Statement of Financial
Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
. These investments have maturity dates greater
than three months, but less than six months. Unrealized gains
and losses related to these securities were not material as of
December 31, 2004.
Accounts Receivable
Accounts receivable are generally billed on a net 30-day basis
with a 2% discount if paid within 30 days.
Occasionally, the Company provides extended payment terms and
greater discounts to its customers to ensure adequate
distribution quantities of its products. Reserves for
uncollectible accounts receivable are established as a charge to
selling, marketing and administrative expenses at the time
collection becomes improbable. A reserve for cash discounts and
trade promotional programs, that are expected to be deducted
from the payments from our customers, is also recorded as a
reduction to sales when the revenue is recorded.
Inventories
Inventories are stated at the lower of first-in, first-out, cost
or market. The composition of inventories is as follows:
June 30,
December 31,
2004
2004
2003
Finished goods
$
2,176
$
2,588
$
665
Raw materials
—
—
989
Work-in-process
—
—
1,436
2,176
2,588
3,090
Less: reserve for obsolescence
(324
)
(72
)
(1,230
)
$
1,852
$
2,516
$
1,860
During April 2004, the Company sold substantially all of
its manufacturing assets located in Fort Worth, Texas to
Cardinal Health PTS, LLC ("Cardinal Health") and
simultaneously entered into a ten-year supply agreement
("Supply Agreement") (see Note 9). As a result of
such sale and related Supply Agreement, the Company no longer
manufactures products and only carries finished goods in
inventory.
F-9
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
Property, Plant and
Equipment
June 30,
December 31,
2004
2004
2003
Property, plant and equipment:
Machinery and equipment
$
319
$
22
$
6,799
Leasehold improvements
790
235
437
Furniture and fixtures
1,204
538
796
2,313
795
8,032
Less: accumulated depreciation
(379
)
(279
)
(3,920
)
$
1,934
$
516
$
4,112
Property, plant and equipment is recorded at cost and
depreciated using the straight-line method over estimated useful
lives ranging from one to ten years. Leasehold improvements are
amortized over the estimated useful lives of the assets or
related lease terms, whichever is shorter. Expenditures for
repairs and maintenance are charged to expense as incurred;
betterments which materially prolong the lives of assets are
capitalized. Depreciation expense was $94 and $463 for the
unaudited six months ended December 31, 2004 and 2003,
respectively. Depreciation expense was $716, $928 and $856 for
the fiscal years ended June 30, 2004, 2003, and 2002,
respectively.
In April 2004, the Company sold substantially all of its
manufacturing assets located in Fort Worth, Texas to
Cardinal Health. In connection with the asset sale, the Company
entered into the Supply Agreement with Cardinal Health, whereby
Cardinal Health manufactures substantially all of the
Company's products. (See Note 9.)
During the fiscal year ended June 30, 2002, the Company
recognized a loss of $417 relating to the write off of certain
capsule manufacturing equipment that was used by the Company in
its contract manufacturing business. The Company exited the
contract manufacturing business during fiscal 2002 and,
therefore, had no future use for the equipment.
Trade Names and License
Agreements
Trade names and license agreements are carried at cost less
accumulated amortization, which is calculated on a straight-line
basis over the estimated useful life of the asset, which is
generally five years.
Impairment of trade names and license agreements is reviewed
annually or when events and circumstances warrant an earlier
review in accordance with SFAS No. 144,
Accounting for
the Impairment or Disposal of Long-Lived Assets
. Impairment
is determined when estimated future undiscounted cash flows
associated with an intangible asset are less than the
asset's carrying value. The Company has determined its
intangible assets to have finite lives and, therefore, is
amortizing these assets over their useful lives. If, in the
future, such assets are considered to be impaired, the
impairment recognized will be measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets on a discounted cash flow basis.
During fiscal year 2004, the Company paid $1,250 to enter into a
development and license agreement with Pharmaceuticals Design
L.L.C. ("PD") for the rights to market respiratory
products in patent-protected packaging configurations. This
asset is being amortized over five years.
F-10
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
In December 2004, the Company entered into an agreement with
JMED Pharmaceuticals, Inc. ("JMED"), an affiliate of
PD, for the ability to transfer the AlleRx® license to
Cornerstone Biopharma Inc. ("Cornerstone"). The
Company paid $2,000 in January 2005 for this license, which is
capitalized as a license agreement and will be amortized through
June 2006. For further discussion of this transaction see
Note 7.
In April 2004, the Company entered into a royalty-bearing
license agreement with Celltech Pharmaceuticals, Inc. As part of
this agreement, the Company recorded a liability, and a related
other asset of approximately $1,270, which represented the
present value of the minimum amount due under the license
agreement. The other asset will be amortized as additional
royalty expense over the ten-year term of the license agreement.
See Note 7 for further discussion of the agreement.
The Company wrote off its trade name asset in the amount of $205
in fiscal 2004 in conjunction with its decision to do business
under the name of Adams Respiratory Therapeutics. This expense
is reflected in selling, marketing and administrative expenses
on the statement of operations. The Company recognized no such
write-offs during fiscal 2003, 2002 or the first six months of
fiscal 2005. Amortization expense was $233 and $75 for the
unaudited six months ended December 31, 2004 and 2003,
respectively. Amortization expense was $531, $168 and $122 for
fiscal 2004, 2003 and 2002, respectively. The estimated
aggregate amortization expense for the next five years and
thereafter with regard to these trade names and license
agreements is:
Remainder of fiscal year 2005
$
865
Fiscal 2006
1,730
Fiscal 2007
480
Fiscal 2008
366
Fiscal 2009
266
Fiscal 2010
116
Thereafter
407
$
4,230
Income Taxes
Income taxes are accounted for in accordance with
SFAS No. 109,
Accounting for Income Taxes
.
Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
years in which the differences are expected to reverse. In
assessing the reliability of deferred tax assets, the Company
considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. This
assessment requires significant judgment and estimates. The
ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income during the period
in which those temporary differences become deductible. The
Company considers its history of losses, scheduled reversal of
deferred tax assets and liabilities and projected future taxable
income over the periods in which the deferred tax items are
deductible. Internal Revenue Code Sections 382 and 383
contain provisions that may limit the net operating loss
carryforward ("NOL") available to be used in any given
year upon the occurrence of certain events, including
significant changes in ownership interest.
F-11
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
Revenue Recognition
The Company recognizes product sales when title and risk of loss
have transferred to the customer, when estimated provisions for
product returns, rebates, chargebacks and other sales allowances
are reasonably determinable and when collectibility is
reasonably assured. Accruals for these provisions are presented
in the financial statements as reductions to sales.
Sales Returns and
Allowances
When the Company's products are sold, the Company reduces
the amount of revenue recognized from such sale by an estimate
of future product returns and other sales allowances. Other
sales allowances include cash discounts, rebates, including
Medicaid rebates, chargebacks, trade promotions and sales
incentives relating to product sold in the current period.
Factors that are considered in the estimates of future product
returns include an estimate of the amount of product in the
trade channel, competitive products, the remaining time to
expiration of the product, and the historical rate of returns.
Consistent with industry practice, the Company maintains a
return policy that allows its customers to return product within
a specified period prior to and subsequent to the expiration
date.
Factors that are considered in the estimates regarding other
sales allowances include historical payment experience in
relationship to revenues, estimated customer inventory levels
and current contract prices and terms with both direct and
indirect customers.
The provision for chargebacks represents the amount payable in
the future to a wholesaler for the difference between the
invoice price paid to the Company by its wholesale customer for
a particular product and the negotiated contract price that the
wholesaler's customer pays for that product. The chargeback
estimates take into consideration the current average chargeback
rates by product and estimates wholesaler inventory levels. The
Company continually monitors its assumptions giving
consideration to current pricing trends and estimated wholesaler
inventory levels and makes adjustments to these estimates when
it believes that the actual chargeback amounts payable in the
future will differ from its original estimate.
Rebates and sales incentives are recognized as a reduction of
sales at the later of (i) the date at which the related
revenue is recorded or (ii) the date at which the
incentives are offered. Trade promotions include co-operative
advertising arrangements and are recorded as a reduction of
sales when the related revenue is recorded. The Company
estimates the cost of rebates, sales incentives and trade
promotions based on its historical experience with similar
programs. In January 2005, the Company issued coupons for the
Mucinex products. Since the coupon was not offered until January
2005, there was no reserve for the coupons as of
December 31, 2004.
If actual future payments for product returns and other sales
allowances exceed the estimates the Company made at the time of
sale, its financial position, results of operations and cash
flow would be negatively impacted.
Cardinal Health Profit Share
Arrangement
On April 1, 2004, the Company sold substantially all of its
manufacturing assets located in Fort Worth, Texas to
Cardinal Health. In connection therewith, the Company entered
into the Supply Agreement with Cardinal Health, whereby Cardinal
Health manufactures substantially all of the
F-12
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
Company's products. Under the Supply Agreement, Cardinal
Health is required to segregate direct manufacturing costs from
indirect manufacturing costs, as defined therein. As finished
goods are completed and shipped to a Company-designated
warehouse, Cardinal Health bills the Company for the actual
direct manufacturing costs incurred plus a mark-up percentage.
The mark-up percentage is strictly provided for interim billing
purposes and the final amount payable to Cardinal Health is
calculated at the end of each contract year (March 31st)
under a profit sharing formula. The amount that is subject to
the profit sharing is calculated as net sales, as defined
therein, less the actual manufacturing cost of the goods sold
during the contract year. The resulting gross profit is subject
to profit sharing rates that decline as the total value of gross
profit increases. At the end of the contract year, a
reconciliation is completed and a billing adjustment is made to
the extent that the actual calculated profit share is greater or
lower than the total mark-up paid to Cardinal Health during the
contract year.
The accounting policy with regard to this arrangement is to
record the actual direct manufacturing cost and mark-up billed
by Cardinal Health as inventory. Each month as such product is
sold, the actual direct manufacturing cost plus an estimate of
the profit share amount earned by Cardinal Health is charged to
cost of sales. The estimated profit share amount considers for
each contract year (i) our projected net product sales and
gross profit, (ii) the projected profit share and
(iii) the contractual minimum profit share amount.
Advertising
Costs associated with television and radio advertising are
expensed in the period the advertising airs and are included in
selling, marketing and administrative expenses. The Company
launched a consumer advertising campaign in November 2004.
Advertising expense was $13,497 and $689 for the six months
ended December 31, 2004 and 2003, respectively. Advertising
expense was $1,087 and $119 in fiscal years 2004 and 2003,
respectively. Advertising expense was less than $100 in fiscal
year 2002. At December 31, 2004, the Company had $8,155 of
prepaid advertising expense relating to advance payments for
commercials that air during the third quarter of fiscal 2005.
Shipping and Handling
Costs
The Company classifies shipping and handling costs within its
selling, marketing and administrative expenses. Shipping and
handling costs were $1,461 and $364 for the six months ended
December 31, 2004 and 2003, respectively. Shipping and
handling costs were $1,038, $389, and $332 for fiscal 2004, 2003
and 2002, respectively. For periods after April 1, 2004,
shipping and handling costs include distribution fees related to
the Cardinal Health distribution services agreement as discussed
in Note 9.
Product Development
Our product development expenses have historically consisted of
formulation and analytical development work with existing and
well established drugs and pharmaceutical ingredients, the
development of scale-up and manufacturing data and stability
programs, human pharmacokinetic studies to establish
bioavailability and bioequivalence data for our products versus
reference drugs, as well as the preparation and filing of new
drug applications with the U.S. Food and Drug Administration.
Further, we invest in the prosecution of patents related to our
products and in clinical research studies in support of our
products. Generally, our formulation, chemistry and analytical
manufacturing controls and stability work has been performed
utilizing our own employees and since April 2004, in
cooperation with Cardinal Health. Product development expenses
include salary and benefits, raw materials and supplies,
F-13
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
facilities, depreciation, and other allocated expenses
associated with the performance of the above work and functions.
Pharmacokinetic studies, clinical trials and certain support
functions in preparing protocols, reports and other regulatory
documents are performed by scientific consultants and third
party contract research organizations. Product development costs
are expensed as incurred.
Accretion of Preferred Stock
The Company adjusts the carrying value of its Series A
redeemable convertible preferred stock ("Series A")
and its Series B redeemable convertible preferred stock
("Series B") and its Series C redeemable
convertible preferred stock ("Series C") to
liquidation value. Such accretion to liquidation value is
included in the calculation of net income applicable to common
stockholders. For Series A and Series B, the holder
could receive, upon redemption, the fair market value of the
preferred stock. For Series C, the holder could receive,
upon redemption, the fair market value of the preferred stock if
such value exceeds liquidation value. To the extent that the
fair value is greater than the accreted liquidation value at the
balance sheet date, the preferred stock is adjusted to reflect
the fair market value with the offset charged to additional
paid-in capital in stockholders' equity.
The Company incurred approximately $870 and $1,196 of issuance
costs in connection with its issuance of Series A and B,
respectively. Such costs have been recorded as a reduction of
the carrying amount of the preferred stock and are being
accreted through a charge to additional paid-in capital up to
the original redemption date, using the effective interest
method and are included in net income applicable to common
stockholders. There were no issuance costs associated with the
Series C.
Concentration of Credit
Risk
The Company sells its products principally to wholesalers and
retailers including mass merchandisers, grocery stores,
membership clubs, and drug stores throughout the United States.
The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no
collateral from its customers. Prior to the increased sales of
Mucinex products, the Company's major customers were
primarily major pharmaceutical and healthcare products
wholesalers. Subsequently, the Company reduced its concentration
levels with certain customers and now sells to a combination of
wholesalers, major retailers and mass merchandisers. The table
below outlines the percentage of gross sales made to the
following customers:
Six Months
Ended
December 31,
Year Ended June 30,
2004
2003
2004
2003
2002
Wholesaler — A
16
%
27
%
24
%
24
%
27
%
Wholesaler — B
9
%
18
%
20
%
32
%
32
%
Wholesaler — C
8
%
27
%
20
%
26
%
13
%
Major retailer — A
14
%
4
%
6
%
2
%
1
%
Major retailer — B
12
%
7
%
6
%
0
%
0
%
Major retailer/mass merchandiser
12
%
4
%
7
%
2
%
2
%
F-14
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance
with the fair value recognition provisions of
SFAS No. 123,
Accounting for Stock-Based
Compensation
, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation —
Transition and Disclosure
("SFAS 123"), for
stock-based employee compensation.
Earnings/ (Loss) per Common
Share
Basic net earnings/ (loss) per common share
("Basic EPS") is computed by dividing net income/
(loss) applicable to common stockholders by the weighted-average
number of common shares outstanding. Diluted net earnings/
(loss) per common share ("Diluted EPS") is
computed by dividing net income/ (loss) applicable to common
stockholders by the weighted-average number of common shares
outstanding, plus potential dilutive common shares. The
following table sets forth the computation of basic and diluted
earnings per common share:
December 31,
June 30,
2004
2003
2004
2003
2002
Net income/(loss)
$
9,228
$
8,942
$
35,826
$
(22,638
)
$
(15,476
)
Accretion of preferred stock
(10,953
)
(320
)
(590
)
(627
)
(619
)
Net (loss)/income applicable to common stockholders
(1,725
)
8,622
35,236
(23,265
)
(16,095
)
Average shares outstanding — basic
16,761,899
12,160,909
13,386,847
8,827,412
8,802,540
Warrants
—
8,556,336
7,949,178
—
—
Stock options
—
1,834,255
3,248,227
—
—
Average shares outstanding — diluted
16,761,899
22,551,500
24,584,252
8,827,412
8,802,540
(Loss)/earnings per common share:
Basic
$
(0.10
)
$
0.71
$
2.63
$
(2.64
)
$
(1.83
)
Diluted
$
(0.10
)
$
0.38
$
1.43
$
(2.64
)
$
(1.83
)
The following table shows common share equivalents outstanding
for the period, which are not included in the above historical
calculations, as the effect of their inclusion is anti-dilutive
during each period:
December 31,
June 30,
2004
2003
2004
2003
2002
Series C convertible secured notes
—
—
—
10,312,180
—
Warrants
9,579,415
3,799,412
3,799,412
15,044,350
3,799,412
Stock options
10,060,023
1,475,785
2,721,785
3,698,217
3,562,932
19,639,438
5,275,197
6,521,197
29,054,747
7,362,344
F-15
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
Pro forma earnings per common share assumes the conversion of
all redeemable convertible preferred stock into common stock:
December 31,
June 30,
2004
2004
Net income, as reported
$
9,228
$
35,826
Weighted-average common shares outstanding
16,761,899
13,386,847
Weighted-average common shares outstanding assuming conversion
    of all redeemable convertible preferred stock
48,055,162
47,992,581
Weighted-average common shares outstanding — basic,
    pro forma
64,817,061
61,379,428
Warrants
7,554,105
7,949,178
Stock options
6,585,796
3,248,227
Weighted-average common shares outstanding — diluted,
    pro forma
78,956,962
72,576,833
Pro forma earnings per common share
Basic
$
0.14
$
0.58
Diluted
$
0.12
$
0.49
Recently Issued Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board
("FASB") issued SFAS No. 150,
Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
("SFAS 150").
SFAS 150 essentially requires issuers to classify as
liabilities certain types of financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. The Company's preferred stock is
contingently redeemable at the option of the holder and
therefore is classified outside of stockholders' equity.
In January 2003, the FASB issued FASB Interpretation
No. 46,
Consolidation of Variable Interest Entities
("FIN 46"), which addresses the consolidation of
business enterprises (variable interest entities) to which the
usual condition (ownership of a majority voting interest) of
consolidation does not apply. The interpretation focuses on
financial interests that indicate control. It concludes that in
the absence of clear control through voting interests, a
company's exposure (variable interest) to the economic
risks and potential rewards from the variable interest
entity's assets and activities are the best evidence of
control. Variable interests are rights and obligations that
convey economic gains or losses from changes in the values of
the variable interest entity's assets and liabilities.
Variable interests may arise from financial instruments, service
contracts, nonvoting ownership interests and other arrangements.
If an enterprise holds a majority of the variable interests of
an entity, it would be considered the primary beneficiary. The
primary beneficiary would be required to include the assets,
liabilities and the results of operations of the variable
interest entity in its financial statements. In December 2003,
the FASB issued a revision to FIN 46 to address certain
implementation issues. The Company does not have any variable
interest entities, thus the adoption of FIN 46 and
FIN 46 (revised) had no impact on the Company's
results of operations, financial position or cash flows.
F-16
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
2.
Benefit Plan
The Company, through a professional employer organization,
provides a 401(k) benefit plan ("the Plan") covering
substantially all employees. Under the Plan, employees are
eligible to participate in the Plan upon attaining the age of 21
and completing six months of service, and can contribute up to
80% of their compensation each year subject to certain Internal
Revenue Code limitations. The Company did not make any
contributions in fiscal 2004, 2003, or 2002. However, the Board
of Directors approved a match on employee contributions made
during calendar year 2005 contingent upon an established sales
threshold for fiscal year 2005. Since the match is on employee
contributions starting on January 1, 2005, the Company did
not record any expense or liability related to this match at
December 31, 2004.
3.
Convertible Notes Payable
In July and August 2003, the Company issued, for cash, $4,636 of
Series C Convertible Secured Notes ("Series C
Notes"). In May and June 2003, the Company issued, for
cash, $11,286 of Series C Notes. The Series C Notes
were offered to all stockholders of the Company through a rights
offering that concluded in August 2003. Between November 2002
and January 2003, the Company issued, for cash, $5,000 of
Convertible Bridge Notes ("Bridge Notes"). In
connection with the Series C Notes, the Bridge Notes, along
with $213 of accrued interest, were converted into $5,213 of
Series C Notes. In June 2004, all outstanding Series C
Notes and accrued interest were converted into
13,814,937 shares of the Series C at a conversion
price of $1.60 per share. (See Note 4.)
In connection with the Bridge Notes issued during fiscal year
2003, the Company issued 943,750 warrants to purchase the
Company's common stock at $0.01 per share. In
connection with the Series C Notes, the Company issued
2,897,195 and 10,312,180 warrants in fiscal 2004 and 2003,
respectively, to purchase the Company's common stock at an
exercise price of $0.01 per share.
F-17
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
Under the Emerging Issues Task Force ("EITF")
No. 98-5,
Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios
, and EITF No. 00-27,
Application
of Issue 98-5 to Certain Convertible Instruments
, the
Company is required to value the warrants and beneficial
conversion feature ("BCF") separately from the notes.
The value assigned to the warrants and BCF is initially recorded
as a discount (debt discount) to the face value of the notes and
an offsetting increase to additional paid-in capital. The debt
discount is amortized to interest expense (a noncash expense)
over the life of the notes under the effective interest method.
The following table provides a reconciliation of the
Series C Notes, Bridge Notes, warrants and BCF, and accrued
interest from their issuance during the fiscal year ended
June 30, 2003 until the Series C Notes, in their
entirety, were converted to Series C on June 30, 2004:
Series C Notes
Bridge Notes
Total Notes
Proceeds from Notes Issuance in fiscal 2003
$
11,286
$
5,000
$
16,286
Accrued interest on Bridge Notes
—
213
213
Subtotal
11,286
5,213
16,499
Reclass Bridge Notes
5,213
(5,213
)
—
Gross Note balance
16,499
—
16,499
Less value assigned to warrants and BCF
(2,888
)
(2,981
)
(5,869
)
Amortization of debt discount (interest expense)
174
2,981
3,155
Balance of Notes as of June 30, 2003
13,785
—
13,785
Proceeds from Note Issuance in fiscal 2004
4,636
—
4,636
Less value assigned to warrants and BCF
(811
)
—
(811
)
Amortization of debt discount (interest expense)
1,406
—
1,406
Subtotal
19,016
—
19,016
Accrued interest
969
—
969
Unamortized discount
2,119
—
2,119
Conversion of Notes to Series C
(22,104
)
—
(22,104
)
Ending balance of Notes as of June 30, 2004
$
—
$
—
$
—
Upon conversion of Series C Notes to Series C in June
2004, the remaining unamortized debt discount of $2,119
resulting from the value of the warrants and BCF, was recorded
as a reduction to additional paid-in capital. At June 30,
2003, the unamortized debt discount associated with the
Series C Notes was $2,714.
4.
Redeemable Convertible Preferred Stock
In June 2004, the Series C Notes were converted into
13,814,937 shares of Series C at a share price of
$1.60. Each share of Series C is entitled to that number of
votes equal to the number of shares of common stock issuable
upon conversion of the Series C.
Holders of Series C are entitled to a liquidation
preference ("Liquidation Value") that is senior to the
Series A and B Liquidation Values. The Series C
Liquidation Value is equal to 200% of the amount invested in
Series C.
F-18
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
The conversion of the outstanding Series C at June 30,
2004 would result in the issuance of an additional
13,814,937 shares of common stock. The Series C are
convertible by the holders into common stock, at any time, at a
price of $1.60 per share subject to adjustment for certain
dilutive events.
Holders of Series C may redeem all, but not less than all,
of their preferred stock at any time during the 90-day period
following June 1, 2005 and during the 90-day period
following June 1, 2007, provided that a qualified public
offering has not been consummated. A qualified public offering
is defined as a firm commitment underwritten public offering of
shares of the Company's common stock in which the per share
price is at least $4.00 and the aggregate offering price paid by
the public for the shares is at least $30,000. The redemption
price for the Series C is equal to the greater of
(i) the Series C Liquidation Value or (ii) the
fair market value of the shares redeemed.
Upon any liquidation, dissolution or winding up of the Company,
the holders of Series C are entitled to be paid, before any
distribution or payment is made on any junior security
(including Series A and B, and common stock) an amount
equal to the Series C Liquidation Value. After the
Series C Liquidation Value is paid, the Series A and B
Liquidation Values will be paid to the holders of Series A
and B on a pari-pasu basis, unless such holders convert their
preferred stock to common stock.
After all Liquidation Values have been satisfied, the remaining
proceeds from the liquidation, if any, will be distributed in a
general distribution to all stockholders based upon their
proportionate ownership in the Company, including warrants and
options. The holders of Series C will participate in the
general distribution in addition to receiving their Liquidation
Value. The holders of Series A and B will receive, at their
election, either (i) the Series A and B Liquidation
Value, respectively, or (ii) the allocable proceeds from
the general distribution, but not both.
In July 2001, the Company issued 14,218,750 shares of
Series B at a purchase price of $1.60 per share. In
connection with the Series B financing, the Company issued
warrants to purchase 2,178,125 shares of Series B at
an exercise price of $1.60 per share. Additionally, during
July 2001, the Company converted $3,057 of convertible notes
payable and accrued interest, then outstanding, into
1,910,447 shares of Series B and issued warrants to
purchase 477,609 shares of Series B at an
exercise price of $1.60 per share.
The conversion of the Series A and B outstanding as of
December 31, 2004 would result in the issuance of
additional 18,111,028 and 16,129,197 shares, respectively,
of common stock. The Series A and B are convertible by the
holders into common stock, at any time, at a price of
$1.45 per share and $1.60 per share, respectively,
subject to adjustment for certain dilutive events.
The Series A and B are redeemable at the option of the
holders, in whole or in part, at any time during the 90-day
period following June 1, 2005 and June 1, 2007,
provided that a qualified public offering has not occurred. The
redemption price is payable in cash in an amount equal to the
aggregate fair market value of the stock at the time of
redemption plus the aggregate amount of all dividends and
distributions declared and paid with respect to the common stock.
So long as there remains outstanding any Series C or any
security convertible into Series C, the Company cannot pay
any portion of the Series A and B redemption value.
Upon a fundamental change or change in control of the Company,
as defined by the Company's certificate of incorporation,
the holders of Series A and Series B are entitled to a
Liquidation Value equal to 100% of the amount invested in
respect of such securities. The Liquidation Value of the
Series A and B
F-19
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
is junior to the Series C Liquidation Value. At
December 31, 2004, the Liquidation Value payable to
Series C, A and B, before any payments are made to any
other class of security, is as follows:
Aggregate
Liquidation
Purchase Price
Value
Series C
$
22,104
$
44,208
Series A
26,261
26,261
Series B
25,807
25,807
Total
$
74,172
$
96,276
Amounts outstanding for each series of redeemable convertible
preferred stock through December 31, 2004:
Series A
Series B
Series C
Balance at July 1, 2001
$
36,620
$
—
$
—
Issued, net of issuance costs
—
24,612
—
Accretion to fair market value
—
7,000
—
Accretion of issuance costs
216
403
—
Balance at June 30, 2002
36,836
32,015
—
Accretion to fair market value
(4,416
)
(4,415
)
—
Accretion of issuance costs
219
408
—
Balance at June 30, 2003
32,639
28,008
—
Issued, net of issuance costs
—
—
22,104
Accretion to fair market value
(6,584
)
(2,585
)
36,679
Accretion of issuance costs
206
384
—
Balance at June 30, 2004
26,261
25,807
58,783
Accretion to fair market value
46,183
38,710
29,732
Accretion to liquidation value
—
—
10,953
Balance at December 31, 2004
$
72,444
$
64,517
$
99,468
5.
Stockholders' Equity (Deficit)
Stock Compensation
Plan
Under the terms of the 1999 Long-Term Incentive Plan (the
"1999 Plan"), employees, directors and others
designated by the Board of Directors may be granted awards in
the form of incentive stock options, nonqualified stock options
or restricted stock.
The classes and number of shares to be granted, as well as the
price of each designated class, are determined by the Board of
Directors at the time granted. Options are exercisable upon
grant, either in whole or in part, unless otherwise specified by
the Board of Directors and will remain exercisable until fully
exercised or expiration, whichever occurs first. However,
options granted are subject to a vesting term,
F-20
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
generally over three to five years from the grant date. Under
the 1999 Plan, options are granted for a fixed number of shares
with an exercise price fixed at the date of grant. The exercise
price of the options is equal to the fair value, as determined
by the Board of Directors, of the Company's stock at the
date of the grant.
The Company accounts for its stock-based compensation in
accordance with the fair value recognition provisions of
SFAS 123 for stock-based employee compensation.
The fair value for these options was estimated at the date of
grant using the minimum value method with the following
weighted-average assumptions:
December 31,
June 30,
2004
2003
2004
2003
2002
Expected life of the option (in years)
6
6
6
6
6
Risk-free interest rate
3.4
%
3.0
%
3.4
%
3.0
%
3.8
%
Volatility
0
%
0
%
0
%
0
%
0
%
Expected dividend yield
0
%
0
%
0
%
0
%
0
%
Weighted-average fair value of stock options granted
$
0.32
$
0.05
$
0.05
$
0.33
$
0.34
The Company recorded stock compensation expense of $179 and $343
for the six months ended December 31, 2004 and 2003,
respectively. The Company recorded stock compensation expense of
$686, $880 and $1,292 for the years ended June 30, 2004,
2003 and 2002, respectively. Because subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing methods do not
necessarily provide a reliable single measure of the fair value
of its stock options.
F-21
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
A summary of the Company's stock option activity and
related information is as follows:
Weighted-
Average
Exercise
Shares
Price
Options outstanding at June 30, 2001
3,304,652
$
1.45
Granted
373,366
1.60
Canceled
(111,201
)
1.45
Exercised
(4,883
)
1.45
Options outstanding at June 30, 2002
3,561,934
1.46
Granted
308,463
1.96
Canceled
(152,430
)
1.55
Exercised
(23,365
)
1.45
Options outstanding at June 30, 2003
3,694,602
1.50
Granted
5,930,938
0.25
Canceled
(379,341
)
1.29
Exercised
(62,205
)
0.14
Options outstanding at June 30, 2004
9,183,994
0.43
Granted (unaudited)
1,005,500
1.73
Canceled (unaudited)
(30,098
)
0.35
Exercised (unaudited)
(99,373
)
0.14
Options outstanding at December 31, 2004(unaudited)
10,060,023
$
0.56
Effective August 2003, all stock options granted to employees
who were actively employed by the Company were re-priced from
exercise prices between $1.45 and $2.00 down to $0.14. The
weighted-average exercise prices prior to June 30, 2003 in
the above table do not reflect the impact of the August 2003
re-pricing.
Weighted-Average
Years Remaining
Number
on
Number
Exercise price
Outstanding
Contractual Life
Exercisable
$0.14
5,995,016
6.4
3,402,744
$0.50
1,291,000
9.1
184,093
$0.78
295,000
9.3
—
$1.06
45,000
9.6
—
$1.45
1,369,513
5.5
1,372,272
$1.60
69,474
7.0
67,499
$1.76
960,500
9.8
—
$2.00
34,520
7.7
34,520
10,060,023
5,061,128
F-22
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
Warrants
At December 31, 2004, the Company has the following
outstanding warrants to purchase stock:
Outstanding
Warrants
Exercise Price
Common Stock
5,871,957
$
0.01
Common Stock
1,051,724
$
1.45
Series B
2,655,734
$
1.60
Total
9,579,415
6.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
The net deferred tax assets relate primarily to NOLs and sales
reserves. Prior to fiscal 2004, it could not be determined that
it was more likely than not the deferred tax assets would be
realized due to the lack of a history of earnings. As a result,
an offsetting valuation allowance was recorded in the amount of
the entire deferred tax asset balance. NOLs approximated $25,700
at June 30, 2004 and will expire between fiscal 2013 and
2018. The Company also had research credits of $1,393 at
June 30, 2004, which will expire between fiscal 2005 and
2009. The NOLs and research credits are subject to limitations
under Internal Revenue Code Sections 382 and 383,
which contain provisions that limit the NOLs and research
credits available to be used in any given year upon the
occurrence of certain events, including significant changes in
ownership interest. During fiscal year 2004, the Company
utilized a portion of its NOLs. Given this utilization, as well
as projections for taxable income for the fiscal year ended
2005, the entire valuation allowance was reversed as of
June 30, 2004.
The (benefit)/ provision for income taxes consists of the
following:
June 30,
2004
2003
2002
Current provision:
Federal
$
519
$
—
$
—
State
150
—
—
Deferred:
Federal
(15,014
)
—
—
State
(1,779
)
—
—
Total (benefit)/provision
$
(16,124
)
$
—
$
—
F-23
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
A reconciliation of the (benefit)/ provision based on the
Federal statutory income tax rate to the Company's
effective income tax rate is as follows:
June 30,
2004
2003
2002
Provision at Federal statutory rate
35.0
%
(35.0
)%
(35.0
)%
State income taxes, net of Federal benefit
(5.4
)
—
—
Research credit
(0.7
)
(0.9
)
(2.4
)
Change in valuation allowance
(113.8
)
30.5
35.5
Debt discount
2.0
4.6
0.4
Incentive stock options
0.7
0.7
1.3
Other
0.4
0.1
0.2
Effective tax rate
(81.8
)%
0
%
0
%
The significant components of the net deferred tax assets are as
follows:
June 30,
2004
2003
Deferred tax assets — current:
Net operating loss carryforwards
$
6,900
$
—
Inventory reserve
26
486
Litigation reserve
—
790
Sales reserves
3,052
1,585
Other
359
360
Total deferred tax assets — current
10,337
3,221
Deferred tax assets — non-current:
Net operating loss carryforwards
2,870
20,383
Deferred gain on sale of plant assets
649
—
Research credit
1,393
1,188
AMT credit
519
—
Nonqualified stock options
899
779
Other
126
68
Total deferred tax assets — non-current
6,456
22,418
Total gross deferred tax assets
16,793
25,639
Deferred tax liabilities
(521
)
Valuation allowance
—
(25,118
)
Net deferred tax assets
$
16,793
$
—
F-24
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
7.
Commitments and Contingencies
The Company has obligations under noncancelable operating leases
for buildings and certain equipment expiring in various years
through August 2014.
Rent expense was $169 and $443 for the six months ended
December 31, 2004 and 2003, respectively. Rent expense was
approximately $677, $989 and $1,221 for fiscal 2004, 2003, and
2002, respectively. Future minimum rental commitments are as
follows:
Remainder fiscal 2005
$
444
Fiscal 2006
776
Fiscal 2007
514
Fiscal 2008
437
Fiscal 2009
492
Fiscal 2010
483
Thereafter
2,000
$
5,146
Future rental commitments are primarily for the office building
in Chester, New Jersey, which terminates August 2014.
In connection with the Supply Agreement, the Company is
obligated to pay a minimum profit share to Cardinal Health of
$4,000, $3,000 and $3,000 during the contract years ending
March 31, 2005, 2006, and 2007, respectively. As of
December 31, 2004, the Company has already paid the minimum
profit share amount to Cardinal Health for the contract year
ending March 31, 2005.
The Company is a party to various claims and suits arising out
of matters occurring during the normal course of business.
However, as of December 31, 2004, there is no current
proceeding or litigation involving the Company that the Company
believes will have a material adverse impact on its business,
financial condition, results of operations or cash flows.
On March 28, 2003, CellTech Pharmaceuticals, Inc., CellTech
US, Inc. and CellTech Americas, Inc. brought suit against the
Company and certain current and former employees in the United
States District Court for the Western District of New York.
Plaintiffs alleged that the Company (and certain individuals)
misappropriated trade secrets and breached confidentiality
provisions in a manufacturing contract and in the
individual's past employment contracts with plaintiffs.
The Company agreed to settle the lawsuit on April 14, 2004
for the amount of $2,000. Additionally, the Company entered into
a royalty-bearing license agreement whereby the Company will
make monthly payments to Celltech based on a percentage of sales
of certain of the Company's products. The license agreement
is for a ten-year period commencing December 31, 2003.
Payments made under the license agreement are subject to an
annual minimum of $200 and an annual maximum of $500. The
Company recorded a liability, and a related other asset, of
approximately $1,270, which represented the present value of the
minimum amount due under the license agreement of ten annual
payments of $200 per year, discounted at 10% per year. The
other asset will be amortized as additional royalty expense over
the ten-year term of the license agreement.
On May 7, 2004 the Company filed a complaint in the
U.S. District Court for the Southern District of New York
against Carolina Pharmaceuticals, Inc. ("Carolina").
The Company filed an
F-25
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
amended complaint on October 25, 2004, which added
Cornerstone as a defendant. The amended complaint alleged
trademark, false advertising and unfair competition claims, and
sought damages and injunctive relief. Carolina and Cornerstone
filed counterclaims against the Company, alleging that the
Company's activities with respect to its single-entity
Mucinex product violate the anti-monopoly provisions of the
federal antitrust laws, that the Company had engaged in false
advertising in violation of federal law with respect to
single-entity Mucinex and the Company's AlleRx(R) and
Aquatab products, and that the Company had violated state law in
competing with the products of Carolina and Cornerstone. In
February 2005, the Company entered into an agreement with
Cornerstone in which it received the Humibid trademarks from
Cornerstone and Cornerstone received the AlleRx® trademarks
from the Company. Additionally, the parties released each other
from all claims and damages in the lawsuit. As part of this
arrangement, the Company is contractually obligated to assume
the financial responsibility for the first $1,000 of returned
AlleRx(R) product, which was sold by the Company prior to
February 15, 2005 and returned to Cornerstone during the
18-month period beginning February 15, 2005. Conversely,
Cornerstone is financially responsible for the first $1,000 of
Humibid product returns for the same 18 month period. After
the $1,000 threshold is met, the Company will have the
responsibility for all Humibid product returns whether sold by
the Company or Cornerstone and Cornerstone will bear the same
liability for AlleRx(R) products. In connection with this
agreement, the Company is obligated to pay Cornerstone a royalty
ranging from 1% to 2% of net Humibid sales for a period of
three years after February 15, 2005.
In March 2004, the Company entered into a development and
license agreement with PD, an affiliate of JMED, in which the
Company licensed certain intellectual property to commercialize
certain respiratory products. Pursuant to the agreement, the
Company paid PD $1,250. Under this agreement, upon a change of
control, which includes a public offering, PD has the right to
exchange the appraised fair market value of all of its economic
interest (i.e., on-going royalty interest) in the licensed
products into shares of the Company's common stock
("Exchange Rights"). The agreement imposes certain
requirements on the parties, but these requirements have been
suspended by an amendment to this agreement. Under the
amendment, the Company has until August 31, 2005 to
determine if the Company wishes to go forward with the
agreement. If the Company decides not to go forward, the Company
has agreed to pay PD $500 and the agreement will terminate
("Termination Fee"). In the event the Company
undergoes a public offering prior to the time the Company has
made an election not to go forward, the Company has agreed to
grant PD $500 worth of common stock, valued at the public
offering price, as an advance against either the Exchange
Rights, or the Termination Fee. After such an offering, the
Company still has the option until August 31, 2005 of going
forward with the products. If the Company does go forward with
the agreement, the parties have agreed to negotiate in good
faith to modify certain terms of the agreement and PD retains
Exchange Rights until the time of such amendment.
In December 2004, the Company entered into an agreement with
JMED for the ability to transfer the AlleRx® license
agreement to Cornerstone and the Company paid JMED $2,000 in
January 2005. In connection with the PD License agreement,
JMED was granted the right to convert its on-going royalty
interest in the AlleRx(R) product to the Company's common
stock in the event of a public offering or change of control.
The assignment of the JMED agreement to Cornerstone provided
that JMED had the right to exchange its royalty interest for the
Company's common stock, as outlined under the PD license
agreement. The valuation of the on-going royalty will be
performed by an outside appraisal firm prior to March 31,
2005. To the extent that the final appraisal exceeds the $2,000
previously paid, JMED will have the right to convert such excess
into the Company's common stock at the price per share in
the public offering. Upon conversion of JMED's royalty
interest into the Company's common stock, the Company will
become the recipient of future royalties earned under the
license agreement. If JMED does not elect
F-26
Table of Contents
Adams Laboratories, Inc.
Notes to Financial Statements — (Continued)
($ in thousands, except per share amounts)
(Information pertaining to December 31, 2004 and for
the
six months ended December 31, 2004 and 2003 is
unaudited)
to convert the excess royalty interest into the Company's
common stock, JMED will continue to collect royalties under the
license agreement and the Company will be paid 40% of such
royalties up to a maximum of $1,000. The Company has agreed to
guarantee the royalty payments due to JMED from Cornerstone
through the date of a change of control or public offering.
8.
Working Capital and Equipment Loans
In March 2002, the Company entered into a Loan and Security
Agreement with Silicon Valley Bank to provide a revolving line
of credit and equipment advances not to exceed $3,500 and
$1,000, respectively. Effective December 2003, the line of
credit was increased to $5,000 and expired in December 2004. As
of December 31, 2004, the Company had no outstanding
obligations under the working capital or the equipment advance
agreement.
9.
Sale of Manufacturing Operation
On April 1, 2004, pursuant to an Asset Purchase Agreement,
the Company sold substantially all of its net manufacturing
assets to Cardinal Health for approximately $5,580, which
exceeded the Company's carrying value of such assets sold.
A deferred gain of approximately $1,690 was recorded in fiscal
2004 in connection with this transaction. The deferred gain will
be amortized as a reduction of cost of sales over the term of
the supply agreement. As of December 31, 2004, the deferred
gain on sale of the manufacturing plant was $1,563. In
connection therewith, the Company and Cardinal Health entered
into the Supply Agreement, whereby Cardinal Health will operate
as the exclusive manufacturer of the Company's products,
including Mucinex. Adams will continue to own its products and
all intellectual property related thereto. Additionally, on
April 1, 2004, the Company entered into a distribution
services agreement with a separate Cardinal Health entity,
whereby Cardinal Health will act as the Company's exclusive
distributor of all the Company's products.
F-27
Table of Contents
Schedule II
Adams Laboratories
Valuation and Qualifying Accounts
($ in thousands)
Valuation and qualifying accounts deducted from assets to which
they apply:
Allowance for accounts receivable
Reserve
Reserve
Reserve
Valuation
for Doubtful
for Cash
for Trade
Allowance for
Accounts
Discounts
Promotions
Deferred Tax Assets
For the year ended June 30, 2002:
Balance at the beginning of the year
$
65
$
25
$
—
$
11,270
Additions: Charged to costs and expenses(1)
39
282
—
6,121
Deductions from reserves
(67
)
(298
)
—
—
Balance at the end of period
37
9
—
17,391
For the year ended June 30, 2003:
Balance at the beginning of the year
37
9
—
17,391
Additions: Charged to costs and expenses(1)
9
385
—
7,727
Deductions from reserves
(11
)
(345
)
—
—
Balance at the end of period
35
49
—
25,118
For the year ended June 30, 2004:
Balance at the beginning of the year
35
49
—
25,118
Additions: Charged to costs and expenses(1)
182
1,526
1,155
—
Deductions from reserves
(14
)
(1,432
)
(167
)
(25,118
)
Balance at the end of period
203
143
988
—
For six months ended December 31, 2004 (unaudited):
Balance at the beginning of the year
203
143
988
—
Additions: Charged to costs and expenses(1)
31
1,469
2,960
—
Deductions from reserves
(33
)
(1,107
)
(1,257
)
—
Balance at the end of period
$
201
$
505
$
2,691
$
—
(1) Charges related to cash discounts and trade promotions
are reflected as reductions of sales to customers.
F-28
Table of Contents
EXCESS MUCUS
DOESN'T LIVE HERE
ANYMORE.
THE FIRST 12-HOUR TABLET TO TREAT RESPIRATORY CONGESTION: MUCINEX
®1,2
THE ONLY 600 mg formulation to maintain the therapeutic effectiveness of guaifenesin over 12 hours
1-3
THE ONLY immediate/extended release to maximize consistent delivery with no peaks and troughs
1-3
THE ONLY BID bi-layer tablet to enhance patient compliance
1-3
For respiratory congestion...
References: 1.
Mucinex product labeling.
2.
Orange Book data. Available at:
http://www.accessdata.fda.gov/scripts/cder/ob/docs/tempai.cfm. Accessed October 29, 2004.
3.
Dataon file, Adams Respiratory Therapeutics, Chester, NJ.
MUCINEX
®
I N
MUCUSOUT
©2004 Adams Laboratories, Inc, Chester, NJ 07930 112204 US Pat. 6,372,252 B1
Table of Contents
Through
and
including           ,
2005 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
Shares
Common Stock
ADAMS LABORATORIES, INC.
PROSPECTUS
,
2005
Table of Contents
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses of Issuance and Distribution.
Estimated expenses payable in connection with the sale of the
common stock in this offering are as follows:
SEC registration fee
$
14,713
NASD filing fee
13,000
Nasdaq National Market listing fee
Printing and engraving expenses
Legal fees and expenses
Accounting fees and expenses
Transfer agent and registrar fees and expenses
Blue Sky fees and expenses
Miscellaneous
Total
$
We will bear all of the expenses shown above.
Item 14.
Indemnification of Directors and Officers.
The Delaware General Corporation Law and our certificate of
incorporation and bylaws provide for indemnification of our
directors and officers for liabilities and expenses that they
may incur in such capacities. In general, directors and officers
are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, our the
best interests, and with respect to any criminal action or
proceeding, actions that the indemnitee had no reasonable cause
to believe were unlawful. Please see our certificate of
incorporation, which is filed as Exhibit 3.1 hereto and our
bylaws, which are filed as Exhibit 3.2 hereto.
We have entered into indemnification agreements with our
officers and directors, a form of which is attached as Exhibit
10.19 hereto and incorporated herein by reference. The
Indemnification Agreements provide our officers and directors
with further indemnification to the maximum extent permitted by
the Delaware General Corporation Law. The purchase agreement
filed as Exhibit 1.1 hereto provides that the underwriters
are obligated, under certain circumstances, to indemnify our
directors, officers and controlling persons against certain
liabilities, including liabilities under the Securities Act.
Please see the form of purchase agreement filed as
Exhibit 1.1 hereto.
We currently maintain a directors' and officers'
liability insurance policy.
Item 15.
Recent Sales of Unregistered Securities.
Set forth below is information regarding shares of common stock
and preferred stock issued, and options and warrants granted, by
us within the past three years. Also included is the
consideration, if any, received by us for such shares, options
and warrants and information relating to the section of the
Securities Act, or rule of the Securities and Exchange
Commission, under which we claimed an exemption from
registration.
(a)
Issuances of Capital Stock
In January 2003, upon the exercise of warrants, we issued an
aggregate of 4,714 shares of common stock at a price per
share of $0.01 to individual investors.
II-1
Table of Contents
In May 2003, upon the exercise of warrants, we issued an
aggregate of 8,257 shares of common stock at a price per
share of $0.01 to an individual investor.
In September 2003, upon the exercise of warrants, we issued an
aggregate of 4,978,827 shares of common stock at a price
per share of $0.01 to an institutional investor.
In February 2004, upon the exercise of warrants, we issued an
aggregate of 896,674 shares of common stock at a price per
share of $0.01 to institutional investors.
In May 2004, upon the exercise of warrants, we issued an
aggregate of 9,878 shares of common stock at a price per
share of $0.01 to an individual investor.
In June, July and August 2004, upon the exercise of warrants, we
issued an aggregate of 1,623,055 shares of common stock at
a price per share of $0.01 to individual investors and
institutional investors.
In October 2004, upon the exercise of warrants, we issued an
aggregate of 91,953 shares of common stock at a price per
share of $1.45 to an individual investor.
In October and November 2004, upon the exercise of warrants, we
issued an aggregate of 759,764 shares of common stock at a
price per share of $0.01 to institutional investors.
In February 2005, upon the exercise of warrants, we issued an
aggregate of 17,444 shares of common stock at a price per
share of $0.01 to individual investors.
In the last three years, we have issued 221,549 shares of
common stock upon the exercise of stock options with a weighted
average exercise price of $0.31 per share.
(b)
Issuances of Series C Preferred Stock
Between May and August 2003, we issued an aggregate of
$21,134,998 in 8% Convertible Notes, which are convertible into
Series C Preferred Stock, together with warrants to
purchase an aggregate of 13,209,374 shares of common stock
at an exercise price of $0.01 per share to individual and
institutional investors, including PSBF, Tullis-Dickerson, EGI,
and Merrill Lynch. In June 2004, we issued an aggregate
13,814,937 shares of Series C Preferred Stock at a
price per share of $1.60 to individual and institutional
investors, upon the conversion of the convertible secured
promissory notes.
(c)
Stock Option Grants
Between March 1, 2002 and February 28, 2005, we had
issued to employees, directors and consultants
7,704,996 shares of common stock upon the exercise of stock
options at a weighted average exercise price of $0.63 per
share and no options to purchase shares of common stock were
outstanding outside our 1999 Long-Term Incentive Plan.
The issuance of stock options and the common stock issuable upon
the exercise of such options as described in this
paragraph (c) of Item 15 were issued pursuant to
written compensatory plans or arrangements with our'
employees, directors and consultants, in reliance on the
exemption provided by Rule 701 promulgated under the
Securities Act. All recipients either received adequate
information about us or had access, through employment or other
relationships, to such information.
All of the foregoing securities are deemed restricted securities
for purposes of the Securities Act. All certificates
representing the issued shares of common stock described in this
Item 15 included appropriate legends setting forth that the
securities had not been registered and the applicable
restrictions on transfer.
(d)
Warrants
In addition to the warrants discussed above, in November and
December of 2002 and January 2003, we issued warrants to
purchase an aggregate of 943,750 shares of common stock at
an exercise price of $0.01 per share to individual and
institutional investors, including EGI, Merrill Lynch, MJG
Partners, PSBF, Tullis-Dickerson, and Talon.
II-2
Table of Contents
No underwriters were involved in the foregoing sales of
securities. The securities described in this paragraphs
(a) and (b) of Item 15 were issued to a combination of
foreign and U.S. investors in reliance upon the exemption
from the registration requirements of the Securities Act, as set
forth in Section 4(2) under the Securities Act and
Rule 506 of Regulation D promulgated thereunder
relative to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was
required. All purchasers of shares of our common 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.
Item 16.
Exhibits and Financial Statement Schedules.
(a)
Exhibits: The list of exhibits is set forth in
beginning on page II-6 of this Registration Statement and
is incorporated herein by reference.
(b)
Financial Statements Schedules:
n/a
Item 17.
Undertakings.
*(f) We hereby undertake 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.
*(h) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of us pursuant to the foregoing
provisions, or otherwise, we have 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 us of expenses incurred or paid by a director, officer or
controlling person of us 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, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
*(i) We hereby undertake that:
•
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 us
    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.
•
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.
*
Paragraph references correspond to those of Regulation S-K,
    Item 512.
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Registration
Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Chester, New Jersey
on March 25, 2005.
Adams Laboratories, Inc.
/s/
Michael J. Valentino
By: Michael J. Valentino
Its: Chief Executive Officer,
President and Director
ADAMS LABORATORIES, INC.
POWER OF ATTORNEY
We, the undersigned directors and officers of Adams
Laboratories, Inc. ("Adams") do hereby constitute and
appoint Michael J. Valentino, David Becker and Walter Riehemann,
and each of them, our true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for
us and in our name, place and stead, in any and all capacities,
to sign any and all amendments including post effective
amendments to the Registration Statement filed on Form S-1
relating to the initial public offering of common stock of Adams
including any registration statement filed pursuant to Rule
462(b) under the Securities Act and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, and we do hereby
ratify and confirm all that said attorneys-in-fact and agents,
or their substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by
the following persons in the capacities and on the dates
indicated.
Name
Title
Date
/s/
Michael J.
    Valentino
Michael
    J. Valentino
Chief Executive Officer and Director (principal executive
    officer)
March 25, 2005
/s/
David P. Becker
David
    P. Becker
Chief Financial Officer (principal financial and accounting
    officer)
March 25, 2005
/s/
John Q.
    Adams, Sr.
John
    Q. Adams, Sr.
Director
March 25, 2005
/s/
Steven A. Elms
Steven
    A. Elms
Director
March 25, 2005
/s/
Joan P. Neuscheler
Joan
    P. Neuscheler
Director
March 25, 2005
II-4
Table of Contents
Name
Title
Date
/s/
Donald J.
    Liebentritt
Donald
    J. Liebentritt
Director
March 25, 2005
/s/
Harold F. Oberkfell
Harold
    F. Oberkfell
Director
March 25, 2005
/s/
William C. Pate
William
    C. Pate
Director
March 25, 2005
/s/
Andrew N.
    Schiff, M.D.
Andrew
    N. Schiff, M.D.
Director
March 25, 2005
II-5
Table of Contents
EXHIBIT INDEX
Exhibit
Number
Description
1
.1
—
Form of Underwriting Agreement*
3
.1
—
Certificate of Incorporation of Adams Laboratories, Inc.*
3
.2
—
Bylaws of Adams Laboratories, Inc.*
4
.1
—
Specimen Stock Certificate of Adams Laboratories, Inc.'s
    Common Stock, par value $     per share*
4
.2
—
Reference is made to Exhibits 3.1 and 3.2
4
.3
—
Amended and Restated Registration Rights Agreement, dated
    July 9, 2001, by and between Adams Laboratories, Inc. and
    certain stockholders
4
.4
—
Series C Preferred Stock Registration Rights Agreement,
    dated May 19, 2003, between Adams Laboratories, Inc. and
    Tullis-Dickerson Capital Focus III, L.P., TD Origen Capital
    Fund, L.P., TD Lighthouse Capital Fund, L.P., EGI-Fund (02-04)
    Investors, LLC and Perseus-Soros Biopharmaceutical Fund, LP.
5
.1
—
Opinion of Alston & Bird LLP*
10
.1
—
Lease Agreement dated April 1, 2004 between Adams
    Laboratories, Inc. and William J. Adams, Jr. for Adams
    Laboratories, Inc.'s office in Chester, New Jersey.
10
.2†
—
Asset Purchase Agreement dated March 24, 2004 between Adams
    Laboratories, Inc. and Cardinal Health PTS, LLC
10
.3†
—
Exclusive Distribution Agreement dated April 1, 2004
    between Adams Laboratories, Inc. and Cardinal Health PTS, LLC
10
.4†
—
Supply Agreement dated April 1, 2004 between Cardinal
    Health PTS, LLC and Adams Laboratories, Inc.
10
.5
—
Commercial Services Agreement dated April 1, 2004 between
    Cardinal Health PTS, LLC and Adams Laboratories, Inc.
10
.6
—
1999 Long-Term Incentive Plan
10
.7
—
Form of Award under the 1999 Long-Term Incentive Plan
10
.8
—
Director Compensation Plan*
10
.9
—
Form of Award under Director Compensation Plan*
10
.10
—
Adams Laboratories, Inc. Retirement Savings Plan
10
.11
—
Employment Agreement with Michael J. Valentino dated
    August 7, 2003
10
.12
—
Income Security Agreement with David P. Becker dated
    September 22, 2004
10
.13
—
Income Security Agreement with John Thievon dated
    September 22, 2004
10
.14
—
Income Security Agreement with Robert Casale dated
    September 22, 2004
10
.15
—
Income Security Agreement with Walter E. Riehemann dated
    September 22, 2004
10
.16
—
Income Security Agreement with Helmut H. Albrecht dated
    October 1, 2004
10
.17
—
Income Security Agreement with Susan Witham dated
    October 4, 2004
10
.18
—
Form of Indemnity Agreement between Adams Laboratories, Inc. and
    Directors and Certain Officers*
23
.1
—
Consent of Alston & Bird LLP (Included in
    Exhibit 5.1)
23
.2
—
Consent of Ernst & Young LLP
24
.1
—
Power of Attorney (included in Part II of this registration
    statement)
* To be filed by amendment.
†
Portions of the exhibit have been omitted pursuant to a request
    for confidential treatment. The confidential portions have been
    filed with the SEC.
II-6